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Some Debt Should Be Left Out Of
Consolidation Programs |
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| Sometimes, when you are consolidating your debt, you may feel tempted to include all your debt into the consolidation process to simplify your life. However, it is sometimes smart to leave some debt out of your consolidation program. The reason is simple; including it won’t serve the purpose of consolidation and may turn out more expensive than leaving it aside. |
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| The negotiation that almost all debt consolidation programs imply can deal with all kind of debt. Under the right circumstances, all debt can be negotiated provided that the creditor has no secure way of recovering his money. Yet, sometimes the terms on certain loans, lines of credit or debts is too advantageous to obtain further concessions from the creditors. |
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Leaving Subsidized Loans Out
Loans that are subsidized are seldom included in consolidation programs because they carry a low interest rate and usually offer very flexible repayment programs. Truth is that these loans alone wouldn’t force anyone to consolidate but they do add up to the overall debt and thus can become a heavy burden, if not alone, at least as part of the total debt that needs consolidation. |
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| However, subsidized loans can easily be excluded (and often are) by consolidation agencies because the terms are usually advantageous. More than often are actually used as a reference for debt negotiations with creditors, setting an example of what the borrower can actually afford. |
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| Examples of subsidizes loans are: federal student loans which are subsidized by the government, certain subsidized private student loans which are sponsored by private institutions and sometimes by the government too (federal or local), home loans for first time home buyers, some business loans, loans for scientific investigations, etc. |
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Exception to the Subsidized Loan Rule
Nevertheless, there are situations when subsidized loans need also to be consolidated along with the rest of consumer debt. These are usually terminal situations where the borrower is resorting to debt consolidation in order to avoid more severe measures like defaulting on certain debts or directly filing for bankruptcy to have debts wiped out.
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| Basically, if the borrower is no longer able to afford the monthly payments that would result of consolidating consumer debt and leaving subsidized loans apart, then, subsidized loans will have to be included within the consolidation programs so as to obtain lower monthly payments by extending the repayment programs. |
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| This is sometimes the only way to achieve affordable monthly debt payments. During negotiation, you may even have to sacrifice the low rates you were awarded in exchange for longer repayment programs. For example, a $10,000 loan with payments of $200 a month during 5 years (4% APR) can be extended to reduce the monthly payments in exchange for a higher rate resulting in payments of $150 during 10 years which implies a monthly payment reduction of 25%. A 25 years period could offer monthly payments of only $116 which implies a 42% reduction. In this example we use round numbers for instructive purposes and we are not including other costs that these loans usually include like insurance, administrative charges, etc. |
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| Length |
Monthly Payment |
Monthly Savings |
| 5 Years |
$200 |
0% |
| 10 Years |
$150 |
25% |
| 25 Years |
$116 |
42% |
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