Debt consolidation is a way for you to consolidate your current debt into one loan, usually at a lower interest rate. Often the rate will be fixed. So rather than writing many checks per month, you will be able to write one check combining all your high interest rate loans and credit card debt.
If you are currently looking to consolidate your debt there are a few steps youll need to go through in order to facilitate the process. Youll need to understand your debt. To do that:
1) Write down all your current debts. You need to be completely honest here. Include all your personal debts, school loans, credit cards, car loans, mortgages, etc.
2) After youve compiled this list, add columns for monthly payments, current interest rate, and balance due.
3) Calculate the amount of money you will actually spend on each loan over the lifetime of the loan. For example, if you pay the minimum balance on your credit card each month, over 30 years (the typical length of the life of the credit card loan) you could wind up paying $40,000. Obviously, this number depends on how much you owe and how much you are paying off and if you are continuing to add to your balance.
Next you will need to consider what type of loan is right for you.
One of the more common methods of debt consolidation available is a balance transfer to a new or existing credit card. Often credit card companies look for new customers via attractive APRs on balance transfers. This is a rather reasonable type of loan to consider. Instead of paying a number of different credit card companies, you have one bill per month, usually at a significantly lower interest rate. Just make sure to review the terms of the offer. How long is this APR good for? Is it available for balance transfers or only new debt? And dont forget to talk to your existing credit card companies. They may be willing to match the terms of the balance transfer offer.
You might also consider refinancing your current mortgage or taking out a second mortgage. The obvious disadvantage to this type of loan is that you are putting your house up as collateral, and decreasing the amount of equity you have in your home. On the plus side, interest on loans secured by property is usually tax deductible.
And, if you are in a position where you have relatives you can turn to this is often the most favorable solution. As with any other loan, you should treat this as a business transaction. Set up a repayment schedule and an interest rate, if any, that will be charged. It is also a good idea to put the agreement in writing, in order to prevent any future confusion.
You can also contact a non-profit service, such as American Consumer Credit Counseling. They can negotiate lower payments for you. Often you will be writing a monthly check to them to cover the loans they will have consolidated for you. If you go this route, it is imperative that you investigate the service before you agree to sign up with them.
Once youve considered all the options available to you, it s time to take stock of the bottom line. Debt consolidation isnt magic. Youll still have debt to repay, and it is possible that your new loan will cost you more over the life of the loan, than your existing debt structure. Just because the monthly payments are less, doesnt mean the actual cost is less. Usually, however, this is not the case.
Review the total cost of the loan to you. Are there fees associated with the loan? Closing costs? Recurring fees? One time fees? Points? What is the interest rate? If this seems a bit too confusing, it may be beneficial to hire a financial expert to guide you through this decision making process.
When youve secured a loan, make sure to read the loan documents carefully. You want to ensure that the terms and interest rate are as you had originally agreed. You also want to make sure you are not being charged any additional fees.
If you are currently looking to consolidate your debt there are a few steps youll need to go through in order to facilitate the process. Youll need to understand your debt. To do that:
1) Write down all your current debts. You need to be completely honest here. Include all your personal debts, school loans, credit cards, car loans, mortgages, etc.
2) After youve compiled this list, add columns for monthly payments, current interest rate, and balance due.
3) Calculate the amount of money you will actually spend on each loan over the lifetime of the loan. For example, if you pay the minimum balance on your credit card each month, over 30 years (the typical length of the life of the credit card loan) you could wind up paying $40,000. Obviously, this number depends on how much you owe and how much you are paying off and if you are continuing to add to your balance.
Next you will need to consider what type of loan is right for you.
One of the more common methods of debt consolidation available is a balance transfer to a new or existing credit card. Often credit card companies look for new customers via attractive APRs on balance transfers. This is a rather reasonable type of loan to consider. Instead of paying a number of different credit card companies, you have one bill per month, usually at a significantly lower interest rate. Just make sure to review the terms of the offer. How long is this APR good for? Is it available for balance transfers or only new debt? And dont forget to talk to your existing credit card companies. They may be willing to match the terms of the balance transfer offer.
You might also consider refinancing your current mortgage or taking out a second mortgage. The obvious disadvantage to this type of loan is that you are putting your house up as collateral, and decreasing the amount of equity you have in your home. On the plus side, interest on loans secured by property is usually tax deductible.
And, if you are in a position where you have relatives you can turn to this is often the most favorable solution. As with any other loan, you should treat this as a business transaction. Set up a repayment schedule and an interest rate, if any, that will be charged. It is also a good idea to put the agreement in writing, in order to prevent any future confusion.
You can also contact a non-profit service, such as American Consumer Credit Counseling. They can negotiate lower payments for you. Often you will be writing a monthly check to them to cover the loans they will have consolidated for you. If you go this route, it is imperative that you investigate the service before you agree to sign up with them.
Once youve considered all the options available to you, it s time to take stock of the bottom line. Debt consolidation isnt magic. Youll still have debt to repay, and it is possible that your new loan will cost you more over the life of the loan, than your existing debt structure. Just because the monthly payments are less, doesnt mean the actual cost is less. Usually, however, this is not the case.
Review the total cost of the loan to you. Are there fees associated with the loan? Closing costs? Recurring fees? One time fees? Points? What is the interest rate? If this seems a bit too confusing, it may be beneficial to hire a financial expert to guide you through this decision making process.
When youve secured a loan, make sure to read the loan documents carefully. You want to ensure that the terms and interest rate are as you had originally agreed. You also want to make sure you are not being charged any additional fees.
About the Author:
Harold Throope, who has been involved in managing debt for more than a decade, has written a useful guide to selecting a debt consolidation program. For additional information on debt consolidation programs, please consult his website. You can get a unique content version of this article from the Uber Article Directory.
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