to winning the lottery, a debt consolidation loan is a debtor’s dream. With one
monthly payment and a fixed monthly payment schedule, you can actually see an
end to those monthly payments.
In reality, consolidating bills isn’t always
easy. If you have a lot of debt, it can be hard to find a consolidation loan at
a lower interest rate. And if you’re not careful, you can end up deeper in debt
than when you started.
Your goal in consolidating your debt should be to
lower your overall costs. To accomplish this there are two things to keep in mind:
Get the lowest interest rate possible
2. Have a plan to pay off your debts
in 3 – 5 years.
Here are some of the best ways to consolidate:
The good news about this method is that with a good credit
rating, you may get a much lower rate than other forms of consolidation loans.
And since credit card issuers don’t require collateral, you aren’t “risking the
Call your current issuer to ask what interest rates they will offer
you if you transfer balances from other cards over to theirs. Go for a fixed rate
if you can get it, and ask them to waive any transfer fees. If you can’t negotiate
a low rate with your current issuer, try shopping for a new card at a site such
as CardRatings.com. But be careful! Too many applications for credit in a short
period of time can hurt your credit rating.
Once you do consolidate this
way, be sure to set up an optimal payment plan so you can be debt-free in 3 –
Home Equity Loans
With a home equity debt consolidation loan, you borrow against
the value of you home, minus any other mortgages. The two major kinds are:
A Home Equity Loan – a fixed amount of money for a fixed period of time (sometimes
at a fixed rate) and
2. A “Home Equity Line of Credit” where you borrow
up to a pre-approved credit limit (interest rates usually variable) and can borrow
again if you still have money available.
These loans can offer attractive
rates, low payments, and the interest is usually tax-deductible if you itemize.
issuers offer no or low closing costs for these loans. Interest rates are often
variable, however, and there’s always the risk that you can lose your home if
you can’t pay.
Cash Out Refinance
Refinancing your home and taking
out money to pay off bills (called “cash-out refinance”) is yet another way to
tap the equity in your home. If you can refinance at a substantially lower interest
rate, you’ll eliminate the high interest costs of the debts you pay off, and you
could even come out with a lower payment than you have right now since rates are
One option to consider: an interest-only loan. By lowering your
monthly payment, you can free up money to use toward paying down other high-rate
debt or building a retirement fund.
Make sure you understand the total cost
of refinancing. Take any money you’ve freed up by paying off other bills and use
that to create an emergency savings fund.
Traditional Debt Consolidation
A debt consolidation loan is an unsecured personal loan, and the only
collateral you are offering for the lender’s security is you. Because lenders
consider them risky loans, they’re usually more expensive and not always easy
to get if you have a lot of debt.
If the interest rate is too high to make
it worth it and the repayment term is ten or fifteen years, you should probably
consider another method of consolidation. However, if the term and interest rate
are right, this can be a great way to actually save money in the end. (Check Bankrate.com
for current averages). Remember, to calculate the total cost of the loan from
start to pay-off.
Credit counseling agencies may
help you get out of debt, though they don’t actually consolidate your debt.
payment plans (usually with lower interest and fees) will be worked out for all
of your eligible debts. You’ll make one monthly payment to the counseling agency,
which will pay all your creditors.
Participating in a credit counseling
program generally won’t hurt your credit rating, and if you stick to the plan
you can be out of debt in three to six years. But be careful which agency you
work with. If the counseling agency pays your bills late, you’ll pay the price
since you’re still responsible to the lender. It happens.
settlement is another option that’s become increasingly popular with consumers
who have a lot of debt and can’t, or won’t, file bankruptcy. You stop paying your
bills and instead make a regular monthly payment to the settlement company. Your
creditors contact them, and not you, about your overdue bills. As your accounts
fall further behind, the negotiation company will settle your balances – usually
for 50% of the balance or less (including fees) depending on the debt. Most people
can be out of debt in less than two years or less using these programs.
not perfect. Your credit rating will be hurt in the short run and you must be
certain you’re dealing with a reputable company or the money you pay each month
could disappear. Still, for consumers who can’t shoulder the burden of debt they
have now, it can be a very good option.
If you have
a 401(k), 403(b) plan or certain types of pension plans, you can borrow against
your nest egg. (You can’t borrow against your IRA.) It’s easy, with no income
qualifications or credit check.
The key here is to borrow against your retirement
account, rather than withdraw from it early so that you don’t end up paying taxes
and a 10% penalty. Also, if you leave or lose your job, you may have to pay your
loan back immediately or pay taxes and penalties for an early withdrawal.
loans typically offer low interest rates, and interest is paid to you, since you
are the lender. While tapping your next egg like this can short-change your retirement,
so can costly debt payments. If you are in your 20’s and 30’s,you obviously have
more time to rebuild a retirement nest egg, but even if you’re in your 40’s or
50’s, you will want to weigh the cost of paying the high interest of the debts
over time, versus borrowing from your retirement account. The return you get from
paying off high-rate debts is guaranteed – while the stock market isn’t.
There is a mathematically optimal way to pay your debts. Choose
a fixed level monthly payment, and commit to it each month. Pay as much as you
can on the highest rate debt first, while payment the minimums on the rest.
almost always suggest consumers with debt start by creating one of these plans.
Many people who do so find they don’t even need to consolidate to get out of debt
in the next few years. They just need a plan and they can do it on their own.
biggest mistakes people make when it comes to consolidation are:
having a plan for paying the debt off after they’ve consolidated, and
Procrastination. Waiting for the “perfect” solution to come along almost always
means you’ll end up deeper in debt. Choose your approach, and start getting out
of debt today!
For more information on dealing with debt, visit www.stopdebtcollectorscold.com.
Detweiler is considered one of the country’s top credit experts. She has been
interviewed in thousands of radio, television and print news stories including
USA Today, The Wall Street Journal, The New York Times, Dateline NBC and many
others. She has testified before Congress several times and worked on reform of
the national credit reporting laws.
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