Debt Consolidation
What is Debt Consolidation?
Debt Consolidation is
typically defined as taking your multiple high-interest loans and consolidating
them into one, low-interest, convenient monthly payment. It is a quick, easy fix
to get out of debt and lower your monthly payments at the same time so that you
can use your money for better things, right? Read on... there are some things that
the lenders don’t tell you about their loans.
There are two types of Debt
Consolidation loans, Home-equity lending (also referred to as a secured loan),
and Personal lending (unsecured loan).
Home Equity loans are given
to consumers to consolidate their debts. You get one monthly payment with,
usually, a pretty good interest rate: between 9 – 12%. This may be a good option
for someone who recently took a cut in pay, divorced, unemployed, or just
overspent their income and the debt repayment became too great. However, the
downside to this is that you are putting your house up as collateral—if you fail
to pay this loan you may find yourself out of the streets.
Personal Lending loans
typically have a higher interest rate, 12 – 15%, but are not secured with
collateral. The bank is taking a greater chance that you will repay the money
borrowed so the fees (interest) are higher.
Who needs Debt
Consolidation?
Debt Consolidation should
only be considered as an alternative to bankruptcy. If you are already behind on
your payments, receiving calls from collection agencies or attorneys, or are
struggling to pay your bills every month then you may be a candidate for a Debt
Consolidation loan.
Who doesn’t need Debt
Consolidation?
Debt Consolidation should
not be considered as a quick-fix to get out of paying your debts. Yes, the lower
monthly payment may sound attractive and I’m sure the selling agent will be very
convincing in telling you how much you deserve the extra money every
month and how much fun you can have spending it. The truth is, however, a Debt
Consolidation may end up costing you more then if you just paid your debt off
yourself.
What to watch out for!
As mentioned before, you
could end up paying out more to your Debt Consolidation loan in the long run.
Here are just a few things to watch out for:
Payments that are too low—Loan
companies entice people with lower payments, but this may only stretch out your
debt further, which, with the extra time in interest, may end up being a lot
more then what you would have paid originally:
For example, you have three debts totaling $12,000, with an average interest
rate of 18% and are making the minimum monthly payments of $240. It would take
you 8 years and 4 months (100 months) to pay of this debt and you would pay out
a total of $24,000!
On
a Debt Consolidation loan however, that same $12,000 loan, if you were paying
only $180 a month at 15% would take you just over 12 years to pay off the total
of $26,100!
Yes, you save a little bit each month will be in debt much longer and will pay
over $2000 more with their ‘money saving’ program!
The interest rate of the loan—as
we mentioned above, make sure that you are aware of the interest rate of your
new loan. Also, read the contract carefully to ensure that your interest rate is
not an ‘introductory rate’ and that it will never increase during the
life of your loan.
Expensive loan add-ons—Be
careful if your loan company tries to talk you into additional ‘services’
such as insurance for sickness, unemployment, and death. These extra benefits
may sound like a great idea, and I’m sure the loan officer will make it sound
very attractive, but these extra fees may end up costing you tremendously. Loan
insurance is sold so that, in the case of unemployment, sickness or injury that
prevents you from working for extended periods of time the loan payments will be
made for you until you recover or are able to go back to work. In the event of
death, the loan will be paid in full so that the surviving spouse isn’t stuck
with the bill.
Again, this may sound great but most people never use the insurance, and, at an
extra $25 - $50 a month, you would be better off putting this money into an
interest bearing savings account should an emergency arise down the road.
Is this a secured loan or unsecured loan?—Is
it possible that you could lose your home if you miss a payment or two? Putting
your home in jeopardy is not worth the risk. If you can’t make your payments now
chances are you will be in trouble again down the road and this time it could
leave you homeless. If your debt is so great bankruptcy may be a better
alternative as usually you are able to exclude your home.
Shop around for a reputable company with low fees
and better rates—Doing a little bit of
homework could greatly pay off. Shop around and look into a few different
agencies and look for the best rates and terms. Make sure you do that math and
see the bottom line!
A few questions to ask:
Are
there any sign-up fees?
What is the interest rate?
What is the monthly payment?
What is the length and terms on the loan?
Can
I pay extra on the loan without any penalties?
What is going to be my total payout during the life of the loan?
A
lot of times Credit Unions typically offer the best rates. If you have one
available make sure you include them in your search.
How can Debt Consolidation
help?
Even though we may sound a
bit negative when it comes to getting a Debt Consolidation loan there are some
benefits and we don’t mean to discourage anyone who is looking into this form of
debt repayment.
Some of the benefits
include:
Making one monthly payment instead of several—Tired
of writing out a dozen checks every month and keeping track of the different
balances and interest rates? It is much simpler only having one creditor to deal
with. Just make sure that you don’t incur new debt now that you have a lower
payment!
Lower interest rate—You
will probably be able to get a lower interest rate then you are currently
paying. Usually, a lower interest rate means less money in the long run.
Lower monthly payment—If
you are having a tough time paying your current debts because the interest rates
and payments are too high then Debt Consolidation may be the right solution for
you. Not only does paying back your debts make you feel good it is also biblical
(Psalm 37:21)! Debt Consolidation can save you anywhere from a few dollars to a
few hundred and may just provide the relief that you need to get back on track.
How can Debt Consolidation
hurt?
Debt Consolidation is often
glamorized and a quick and easy way of getting out from under your debt so that
you can get on with your life. You are special, you deserve it! The facts are,
however, that Debt Consolidation is not for everyone and should only be
considered by those who truly need the help.
Debt Consolidation loans
may hurt your credit—By getting new
loans and closing out the old you are actively using your credit and your report
will reflect that with a lower FICO score. Typically the loan benefits may
outweigh the drop in your credit score in the long run, but should be avoided if
you are capable to do so.
Getting further into debt—Without
proper training and guidance to discipline the consumer, the same root problem
still exists: overspending and poor money management. If you are debt you may
want to seek help with learning how to budget properly, curb your spending
habits, and, most importantly, cut up those credit cards or store them away in a
safe place for emergencies (note: a new pair of shoes or a bowling ball does not
constitute an emergency). Without proper spending habits and discipline, you may
be in danger of running up more debt now that you have a lower monthly payment.
Don’t do it!
Visit the other pages on our site where we give advice and tips on
developing
(and sticking to) a budget, how to
balance your checkbook, and money saving
techniques and tricks.
Debt Consolidation
Alternatives
Negotiating with your
creditors on your own—If you are not too far behind on your payments you may be
able to call your creditors on your own and ask for a lower interest rate. Many
credit card companies would rather take a cut in their interest as an
alternative to you filing bankruptcy. Explain the situation to them, let them
know that you want to pay off your debts and see if they would be willing to
help, but don’t threaten!
Credit Counseling &
Debt
Settlement—We’ve also written articles about these alternative forms of debt
repayment. You may want to look into each of these to see which one is right for
you and your current situation.
Please visit our
sponsor page if you are interested in learning more about Debt Consolidation.
