Debt consolidation is a great way to obtain lower rates on a loan. Its on of the best debt management techniques mostly used with credit card debt. However, it also can be dangerous if you don't have a plan.
Emergency situations do occur in our lives. If you are currently in debt and an event such as finding out you have cancer, your spouse demanding a divorce, or getting sued complicated the situation. The problem isn't how you spend your money, it is more on where can you get additional funds to finance your monthly bills. A drop in income brought about by losing your job or lower business profits without a corresponding decrease in your fixed expenses. If you avoid changing your lifestyle because you believe that another job or a pickup in the market is just around the corner. In the meantime, you either spend your savings, investments or start building credit card debts.
It is best to have all these rates translate to APRs (annual percentage rates) or AERs (annual equivalent rates) before making a comparison. So never look at the rates that the company headlines, but rather at the AER or APR which are more indicative. Annual Percentage Rate The cost to borrow money is indicated by an APR and when you are looking for credit cards or personal loans this may be the quotation you receive from the companies or mortgage lenders. Such an APR will also include the upfront fees which will be charged. This would have been distributed over the period that you require to borrow the money for.
Maybe you bought unnecessary items while shopping or took too many vacations. Whatever happened, until you figure out how to spend less than what you earn, you are trapped. You cannot escape your ultimate fate - you and credit card debt are going to be partners as long as the banks are willing to support you and you continue to be their slave by your own free will.
Equivalent Annual Rate If you are borrowing money in an overdraft, you will most often be quoted an EAR. EARs do not include any administrative charges when you are overdrawn. However such a rate will indicate the cost you would have to incur in case you are overdrawn for the period of a year. Such calculations would include the cost of compounding, or interest on interest, the rate of interest and how often it will come into play during the year when you remain overdrawn.
If you can qualify for a debt consolidation loan and you have the disciple NOT to use your charge cards again, then this option is a good choice. Credit counseling will pay-off your debt in a reasonable time (about 5-8 years). However, if you miss a payment, you will be booted from the program. Also, your credit will be negatively affected. Keep in mind credit counseling has about a 75% drop-out ratio.
So it follows that accounts where interest is paid monthly will be lower than the rates where such interest is paid once a year. If interest gets compounded then the net effect is you get higher returns than the interest paid once a year. For example if the interest rate offered is 6.25%, it may sound more attractive than a rate of 6.12% paid on a monthly basis. However because of the compounding effect the actual AER on the monthly interest payments may be 6.29% which is higher than the interest rate offered on annual payments. AERs take into account the charges for withdrawal of money. This may be the fees you will be charged for any withdrawal and can be 30 days interest.
You should obtain clarification as to whether any introductory bonus offered has also been included in the AER. This will allow you to compare it correctly with any other account that offers the same rate of interest throughout the year. So whether it is an item you are buying with a loan arrangement or you are considering debt consolidation as an option, make sure you feel fluent with the financial jargon, so you can make the best decisions.
Emergency situations do occur in our lives. If you are currently in debt and an event such as finding out you have cancer, your spouse demanding a divorce, or getting sued complicated the situation. The problem isn't how you spend your money, it is more on where can you get additional funds to finance your monthly bills. A drop in income brought about by losing your job or lower business profits without a corresponding decrease in your fixed expenses. If you avoid changing your lifestyle because you believe that another job or a pickup in the market is just around the corner. In the meantime, you either spend your savings, investments or start building credit card debts.
It is best to have all these rates translate to APRs (annual percentage rates) or AERs (annual equivalent rates) before making a comparison. So never look at the rates that the company headlines, but rather at the AER or APR which are more indicative. Annual Percentage Rate The cost to borrow money is indicated by an APR and when you are looking for credit cards or personal loans this may be the quotation you receive from the companies or mortgage lenders. Such an APR will also include the upfront fees which will be charged. This would have been distributed over the period that you require to borrow the money for.
Maybe you bought unnecessary items while shopping or took too many vacations. Whatever happened, until you figure out how to spend less than what you earn, you are trapped. You cannot escape your ultimate fate - you and credit card debt are going to be partners as long as the banks are willing to support you and you continue to be their slave by your own free will.
Equivalent Annual Rate If you are borrowing money in an overdraft, you will most often be quoted an EAR. EARs do not include any administrative charges when you are overdrawn. However such a rate will indicate the cost you would have to incur in case you are overdrawn for the period of a year. Such calculations would include the cost of compounding, or interest on interest, the rate of interest and how often it will come into play during the year when you remain overdrawn.
If you can qualify for a debt consolidation loan and you have the disciple NOT to use your charge cards again, then this option is a good choice. Credit counseling will pay-off your debt in a reasonable time (about 5-8 years). However, if you miss a payment, you will be booted from the program. Also, your credit will be negatively affected. Keep in mind credit counseling has about a 75% drop-out ratio.
So it follows that accounts where interest is paid monthly will be lower than the rates where such interest is paid once a year. If interest gets compounded then the net effect is you get higher returns than the interest paid once a year. For example if the interest rate offered is 6.25%, it may sound more attractive than a rate of 6.12% paid on a monthly basis. However because of the compounding effect the actual AER on the monthly interest payments may be 6.29% which is higher than the interest rate offered on annual payments. AERs take into account the charges for withdrawal of money. This may be the fees you will be charged for any withdrawal and can be 30 days interest.
You should obtain clarification as to whether any introductory bonus offered has also been included in the AER. This will allow you to compare it correctly with any other account that offers the same rate of interest throughout the year. So whether it is an item you are buying with a loan arrangement or you are considering debt consolidation as an option, make sure you feel fluent with the financial jargon, so you can make the best decisions.
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