[Solution]Debt Consolidation as a Debt Reduction Strategy Justin Granovsky

Debt Consolidation as a Debt Reduction StrategyJustin Granovsky.1em;”>, an assistant manager at a small retail shop in Las Vegas, Nevada, had an unusual amount of…

Debt Consolidation as a Debt Reduction StrategyJustin Granovsky.1em;”>, an assistant manager at a small retail shop in Las Vegas, Nevada, had an unusual amount of debt. He owed $5400 to one bank, $1800 to a clothing store, $2700 to his credit union, and several hundred dollars to other stores and individuals. Justin was paying more than $460 per month on the three major obligations to pay them off when due in two years. He realized that his take-home pay of slightly more than $2100 per month did not leave him with much excess cash. Justin discussed an alternative way of handling his major payments with his bank’s loan officer. The officer suggested that he pool all of his debts and take out an $11,000 debt-consolidation loan for seven years at 14 percent. As a result, he would pay only $206 per month for all his debts. Justin seemed ecstatic over the idea.(a) Is Justin’s enthusiasm over the idea of a debt consolidation loan justified? Why or why not?(b) Why can the bank offer such a “good deal” to Justin?(c) What compromise would Justin make to remit payments of only $206 as compared with $460?(d) If you assume that the debt-consolidation loan will cost more in total interest, what would be a justification for this added cost?

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