Debt Consolidation Loans

Will You Qualify for a Debt Consolidation Loan?

Shaun Connell — Sat, 05 Feb 2011 02:26:22 +0000

Just because you see debt consolidation loans are advertised frequently doesn’t mean these loans are easy to get. Like other loans, debt consolidation loans have approval criteria that must be met before you can be approved for the loan. If you don’t meet the criteria, unfortunately, you may not be approved. Save yourself the trouble of applying and being denied by checking the qualification criteria first.

Check Your Own Credit First

Before you shop around for debt consolidation loans, check your credit to see where you stand. Review your credit report to see if you have any unpaid debt collections or past due balances since these will have an impact on your ability to borrow a loan. Then, check your credit score to gauge where you stand. Credit scores generally range from 300 to 850. The higher your credit score is, the better chance you have of being approved for a debt consolidation loan. If your credit score is in the 500s you have a very small chance of getting approved at all.

Ask for the Approval Criteria

Once you’ve found a lender that you want to borrow the debt consolidation loan from, ask about their approval criteria. The lender probably has at least a minimum credit score and income rating that’s required for a certain loan amount. If you know you have certain delinquencies on your credit report, ask about the likelihood that you’ll be approved with that information on your credit report. Asking these questions upfront will give you an idea of whether you’ll get approved or not. If it seems like your credit history won’t meet the lender’s criteria, save yourself the credit inquiry and look elsewhere.

Avoid Scams

Any debt consolidation loan that guarantees approval without ever checking your credit history is more than likely a scam. All lenders do some type of credit check before they can tell you whether you’re approved, how much you’re approved for, and the rate you’ll have to pay on the loan. Don’t get too excited about any type of loan guarantee. It may backfire.

Using Home Equity

If you have home equity that you can borrow from, there may be more relaxed credit standards since your home will secure the debt consolidation loan. However, you may face a higher interest rate based on a lower credit score.

Other Options

If you don’t qualify for a debt consolidation loan and you don’t have home equity, there are still other options for dealing with your debt. Credit counseling, debt settlement, and finally bankruptcy are all worth considering.

Tips for Credit Counseling Success

Shaun Connell — Wed, 02 Feb 2011 05:56:59 +0000

Not everyone who enters a credit counseling program finishes the program with their debt paid off. Many people end up filing bankruptcy. Others simply quit the program and maybe pay their debts on their own. Even though you’ve enlisted the help of a credit counseling program, you’re still responsible for making sure the program works. Here are some things you can do to make sure credit counseling is successful.

Follow the credit counseling agency’s rules and advice. The credit counseling agency will give you some tips and advice that you should follow while you’re on the debt management plan. As much as you may want to do differently, it’s important that you follow this advice until you’ve completely paid off your debt.

Make your payments on time. If you don’t send your payment to the credit counseling agency on time, then the credit counseling agency can’t make payment to your creditors on time. Late payments can still generate late fees and worse, the credit card issuer may drop the debt management plan. When that happens, your credit card interest rate and minimum payment will go back to what they were before you enrolled in credit counseling.

Confirm that your payments are being sent. Even though you’ve trusted the credit counseling agency to make payments to your creditors, you still need to make sure that’s being done. Continue to check your monthly credit card statements to confirm that your payments are sent on time and that the right payment amount has been made.

Don’t create more debt. One of the criteria for making any debt management solution work is to avoid creating more debt while you’re trying to pay off your current debt. Adding more debt will only make it harder to keep up your debt payments. You could reverse the progress you’ve made paying off your debts.

Pay extra when you can. Most debt management plans aim to have your debt repaid within three to five years. You can pay off your debt sooner than that if you make extra payments. Make sure you understand how the credit counseling agency handles additional payments. If you have a say in the matter, direct them to send the extra payment to a specific debt, preferably the one with the highest interest rate.

A credit counseling agency can do so much to help you pay off your debt. You also have to take some important steps to make sure debt payoff really happens.

Alternatives to Filing Bankruptcy

Shaun Connell — Tue, 01 Feb 2011 04:31:26 +0000

It’s been said that bankruptcy should be a last resort – a way to handle your debt when absolutely nothing else will work. If you’re considering bankruptcy, but you haven’t explored any other alternatives, then you should look at other options before you make a final decision.

Credit Counseling

Bankruptcy law requires you to get credit counseling from a court-approved agency before you can file bankruptcy. You may be able to get back on track and make your minimum debt payments with the help of a credit counseling agency. They can negotiate a lower interest rate and minimum payment with your creditors to give you some room in your budget. If credit counseling doesn’t work for you, then you have 180 days to file bankruptcy before you would have to go through credit counseling again.

Debt Consolidation

Debt consolidation could be an alternative to bankruptcy if your credit is good enough to get an unsecured loan to cover your debts or if you have home equity you can borrow against. Only consolidate your debts if you know you’ll be able to afford the consolidation loan payments. Otherwise, you might still have to file bankruptcy for the debt. And if you’ve used your home equity to consolidate debt, you won’t be able to get the debt discharged in bankruptcy.

Debt Settlement

Settling your debt can work if you can afford to put aside money every month that can be used for a settlement. When you settle your debt, your creditors agree to accept a lower payment as full satisfaction for your balance. Debt settlement isn’t guaranteed, as creditors aren’t required to settle your debts. If they believe they can get full payment from you, they won’t agree to a settlement. The amount you’d have to save each month depends on the total amount of your debt, but the goal is to settle your debt for at least 50% in three years or less.

Do Nothing

If you don’t have a steady income and you don’t have any assets a creditor could take from you, then you’re said to be judgment proof. That doesn’t mean you can’t get sued or that you should ignore a lawsuit. However, the creditor would have a hard time getting payment from you even if the court grants a judgment. Beware, most judgments are enforceable for several years. If the judgment creditor learns that your financial situation has improved, they can take you back to court for payment.

Evaluating the Alternatives

Bankruptcy isn’t a decision that should be taken lightly. It has long-lasting effects and can be difficult to recover from. But, bankruptcy was created for a reason – to give people a fresh financial start.

How to Start Managing Your Debt

Heather Pedersen — Fri, 28 Jan 2011 22:45:13 +0000

Managing debt is a must for everyone who has even a little debt. It’s not always about paying off your debt, but about keeping your debt and your debt payments under control so your finances flow smoothly.

Debt Management: Getting Started

The first part of debt management is to figure out how much and who you owe. Once you get an understanding of your debt you might find that it’s worse than what you thought, or it could be better.

When you list your debt, also write down your monthly payment. If you’re paying something other than the minimum payment, then write down both the minimum payment and your actual payment, even if your real payment is $0.

Decide How to Manage Your Payments

If you’re having trouble making your payments, especially if you’ve been missing payments, you must figure out a long-term debt solution. You can’t continue missing payments. Eventually, your creditors will come after you. They may sue you and could even garnish your wages or levy your bank account. That’s not what you want to happen.

Be proactive about your debt situation and evaluate one of several debt management solutions:

Debt Consolidation
Credit Counseling
Debt Settlement
Bankruptcy

There are pros and cons to each debt management solution, so it’s important that you learn about all of them and choose the one that’s for your financial situation.

Better Manage Your Income

Managing your debt is about more than just the debt you owe. It’s about your entire financial situation. Making good use of the income you bring in may allow you to manage your debt without a debt management solution. Or, it could make your budget easier while you’re using a debt management solution.

If you don’t already have a budget, you should create one now. A budget helps you plan your expenses based on your income. You can use your budget to correct any overspending that’s been making it harder to meet your monthly debt obligations.

A budget also helps you realize if you simply don’t make enough money to cover all your expenses in which case you’ll have to more drastic measures. When your expenses are more than your income you’ll either have to figure out how you can cut your expenses or increase your income enough to cover your expenses and your debt payments.

You may be able to make money online, especially if you have a skill in web design, graphic design, or writing. There are several ways to make money online, the key is being creative an leveraging the skills you already have.

Managing debt is a necessary step for anyone who has debt. Even if you’re not actively trying to pay off all your debt, you have to manage your debt to keep it from getting out of control.

Disadvantages of Debt Consolidation

Shaun Connell — Fri, 28 Jan 2011 03:48:35 +0000

If you’re thinking about alleviating your debt trouble by consolidating your debts, there are some disadvantages of debt consolidation you should consider.

You’re not really paying off your debt. When you use a debt consolidation loan to combine your debts, you’re only reorganizing your debt. Your payments may be easier to make, but you can’t let that fool you into thinking you can handle more debt, because you can’t. In fact, you may even be denied for new credit cards or loans since your debt load hasn’t changed. If that happens it’s for the best.

If you use a home equity loan, second mortgage, or home equity line of credit to consolidate your debt, then you’ve put your home on the line for unsecured debt that could be bankrupted if necessary. If something happens and you can no longer afford to make payments on your home equity loan or second mortgage, you risk foreclosure. Eliminating the debt through bankruptcy isn’t an option once it’s secured by your home.

Debt consolidation may not reduce your monthly payment. There are two ways to lower your monthly payment through debt consolidation. The first is by lowering your interest rate. However, you may not qualify for a lower interest rate if you’ve been late on payments or if you have a lot of debt. The other way to lower your monthly payment is to extend the length of the loan. Doing that means you’ll pay on your debt longer and you’ll end up paying more interest over the long run. It’s not the ideal situation, but it may be the best choice you have.

Your credit score could be affected if you try to consolidate your debts using a credit card balance transfer. That’s because a large part of your credit score (30%) takes into account how much of your credit limit is being used. If a balance transfer puts you close to your credit limit, you’ll face a temporary drop in your credit score. Fortunately, your credit score can rebound as you pay off your credit card balance.

A large balance isn’t the only drawback of consolidating with a balance transfer. Many people sign up for introductory balance transfer offers, but are unable to pay off the balance under the introductory period. Quite often the new interest rate is even higher than the interest rates before you transferred balances. If you haven’t paid off a significant part of your debt, you could be back in the same situation – a large minimum payment that you can barely afford.

These disadvantages are very real, but can be managed if you decide that debt consolidation is the best option for your debt.

What To Do: Not Having Trouble, But Still Need to Pay Your Debt

Shaun Connell — Thu, 27 Jan 2011 04:59:58 +0000

There are plenty of people in debt but who are managing their minimum monthly payments just fine. They’re not late on payments and they’re not feeling overwhelmed by their debt. Still, when they add up all their debt or calculate their net worth, the numbers say that they have too much debt. What are the options for these types of borrowers?

Debt Consolidation

Credit counseling, debt settlement, and bankruptcy are for people who are having trouble paying back their debts. These are all strategies that help you lower your minimum payment or eliminate your debt completely. However, if you can afford to pay your debts, but you’d rather pay it off quicker or cheaper, debt consolidation is a better option.

Debt consolidation lets you combine your debts by paying them off with a lump-sum loan. Then, you make payments on the debt consolidation loan. Your payments may be lower than they previously were. They could even be higher if you’ve lowered the debt payoff time.

Accelerating Debt Payments

Another option is to accelerate your debt payments by sending extra payment to your creditors each month. If you’re comfortably making your minimum payments each month, then it’s probably safe to say that you could increase what you’re paying and pay off your debt even faster. The key is to figure out how much extra you can send each month.

If you don’t already have one, create a budget for your income and expenses so you know where your money is going and how you can come up with the extra money to pay your debt. The more you can put toward your debt each month, the faster you can pay off your debt.

Rather than spread your extra payment among all your debts, pick one that you want to pay off first. Send your extra payment to that creditor while continuing the minimum payments on all your other debts. Then, when you’ve paid off that first debt begin sending the extra payment to another one of your debts. Keep up this process until you’ve paid off all your debts.

Do Something Different

If you keep paying your debts at the rate you’re going now, it could take several years before you’re finally debt free. Not only that, you’d end up paying much more interest than if you paid your debt off quicker. If you’re already making it fine with your debts, consider consolidating them so you’ll have one debt payment or accelerate your debt payment by paying more than the minimum each month.

Debt Settlement Fact and Fiction

Shaun Connell — Thu, 27 Jan 2011 04:55:32 +0000

What people say about debt settlement and what’s really true about debt settlement are two different things. If you’re seriously consider debt settlement as a solution to your debts, then you need to know how this strategy works and how it will affect you.

Debt Settlement and Your Credit Score

If you’ve read about debt settlement, you’ve probably also read about its impact on your credit score. It’s true that settling your debts will hurt your credit score, here’s why. First, you can’t settle accounts that are already current on the payments. You have to fall behind before you can settle debts. The late payments will hurt your credit score. The more accounts you fall behind on, the more your credit score will be hurt. Settling your delinquent debts, as opposed to paying them in full, will also have an impact on your credit score.

The good news is that the negative information will only be on your credit report for seven years and you can start rebuilding your credit score as soon as you pay off your debts.

You Will Owe Additional Taxes

Part of the tax rules say that you must pay taxes on cancelled debts. If the amount of your debt that’s cancelled is more than $600, that amount will be reported to the IRS and you’ll be expected to include it as taxable income on your income taxes.

There is an exception that allows you to avoid reporting cancelled debt as income on your tax return. If you are insolvent at the time you settled your debt, you don’t have to include the debt on your taxes. But, you do have to file Form 986 with the IRS showing that you were insolvent when the debt was cancelled. Insolvent means your debts outweighed your assets at the time the debt was cancelled. In other words, you had a negative net worth.

You Have to Be Delinquent to Settle Your Debts

This is true. Creditors only settle debts with customers who they believe are at risk of defaulting on payments. If you’ve been current on all your payments to date, the credit card issuer has no reason to believe you’ll default on your payments. If you tell them you intend to settle while your account is still current, you risk being sued for the debt.

Debt settlement is not a solution for people who just want to get out of paying their debts, but for those who are legitimately having trouble making their debt payments. In that case, you may have already fallen behind on your debt payments and your accounts could be in a stage that they’re ready to be settled.

Knowing what is and it not true about debt settlement will make it a little easier to decide if this is the strategy you want to move forward with.

Tips to Avoid a Debt Consolidation Scam

Shaun Connell — Thu, 27 Jan 2011 02:01:23 +0000

If you decide debt consolidation is the best way to pay off your debts, be on the lookout for scams, as you should be with all the debt solutions. Know the signs of a debt consolidation scam and be prepared to walk away if things seem shady.

Advance Fee for the Loan

Some debt consolidation loan scams are really just advance fee loan scams. It’s against the law for companies to require you to pay upfront to receive a loan, so if any company asks you to send payment to secure a loan, be prepared for a scam. Advance fee loan scams most often ask you to wire money or send funds via certified check. Unfortunately, once the company has your money you may never hear from them again. Legitimate debt consolidation loans will have an application process and will do a credit check before they can give you a loan amount, interest rate, or even approval.

Debt Settlement Disguised as Debt Consolidation

Debt consolidation involves paying off your debts using a large lump sum loan. Debt settlement, on the other hand, involves paying your debts at a lower cost. There have been companies who market themselves as debt consolidation companies, but really provide debt settlement services. If you fall prey to one of these scams, unfortunately, you may not find out until several months later when your creditors contact you. Ask detailed questions about the type of services the debt consolidation company provides and move on if you can’t get clear answers.

Too Good to Be True Promises

While it’s true that your monthly payment may decrease when you get a debt consolidation loan, it probably won’t drop by 30% to 50% as some debt consolidation companies promise. You may be able to get a lower interest rate, but that rate depends on your credit history and it can’t be promised until the lender has done a credit check. Finally, debt consolidation companies can’t erase negative information from your credit report. Sure, the loan may clear up past due balances when they’re paid off, but the delinquent status will stay on your credit report through the credit reporting time limit.

Little Details About the Lender

When you’re taking out a debt consolidation loan, it’s important that you know who you’re borrowing from. The lender should be willing to give their business name and address – an email address and toll-free telephone number are not enough to identity a legitimate business. No matter the reason, if a lender isn’t willing to tell you who they are and where they’re located, walk away. There are better options.

How to Choose a Debt Settlement Company

Shaun Connell — Thu, 27 Jan 2011 01:59:11 +0000

You don’t have to hire a company to settle your debts – that’s something you can do on your own. But, if you don’t feel comfortable negotiating with your creditors or you don’t feel you could do justice to the process, you can hire a debt settlement company. When you go on the hunt for a company to help settle your debts, it’s important that you look out for companies who are running scams.

What Type of Fee is Collected Upfront?

People who complain about debt settlement companies say they paid hundreds of dollars into the settlement program and that money didn’t go toward a settlement. Instead, it was applied to a hefty debt settlement fee. The upfront fee structure is not in your best interest because that means it takes longer for you to finally settle a debt. A trustworthy settlement company will instead charge you the fee when a debt is settled and only for that debt. These are the rules that for many for-profit debt settlement companies have to follow. Even without the rule, that’s fairest for the customer.

Does the Settlement Firm Discuss Your Options?

Before a debt settlement firm agrees to take on your case, they need to discuss your finances with you. The company needs to have an understanding of what you owe, how much you owe, and the monthly payment you’ll be able to make. Believe it or not, if you put aside enough money each month to make a settlement, you may not be a good candidate for debt settlement. A reputable company will take time to understand this.

Is the Company Clear About How it Operates?

Though you may be eager to get started on a debt settlement program, you should take time to ask questions before you decide on a company. Make sure you understand how much you have to pay each month, where your payments accrue, and whether you’ll have access to your dedicated account. Ask how much success the company has had with settlements sooner than yours and the approximate amount of time it will take to settle your accounts. Find out how long the company has been operating – the longer the better because they’ve had more experience settling accounts.

What Do Other Customers Say?

Find out what other people say about the settlement company by visiting the Better Business Bureau website at BBB.org. You can also check with your state Attorney general to see if there have been any complaints about a particular debt settlement company you’re considering. An internet search might also show you whether previous customers have had good or bad experiences with a specific company.

Benefits of Debt Settlement

Shaun Connell — Fri, 21 Jan 2011 06:04:52 +0000

Debt settlement is when your creditors accept a lower lump-sum payment as satisfaction for your debt. Once you make the settlement payment, the rest of the balance is cancelled and you no longer have to deal with that particular debt. If your considering debt settlement, here’s what you have to look forward to.

Lower total payment on your debt.

The idea behind debt settlement is to pay 40% to 60% of your balance. Creditors agree to debt settlement offers and sometimes extend their own settlement offers because they’re afraid they may not get any money at all on the debt. Debt settlement is beneficial because it lets you get a large part of your debt cancelled.

Immediate relief from payments.

If you’re struggling with your debt payments right now, you can receive some relief from those payments as soon as you decide you’re going to settle your debts. Note that it’s not your creditors who give you relief, rather your conscious decision to let your debts fall behind so you can reach a settlement once you save up enough money. Choosing debt settlement gives you some breathing room, but it’s important that you start saving for settlement as soon as you decide you’re going to settle your debts.

Pay off your debts sooner.

If you have access to enough money, e.g. a home equity loan or line of credit, you can settle your debts in as little as six months. When you have enough cash available, you can make a settlement as soon as the accounts are ready, that’s usually when they’re at least 90 past due, but sometimes 120 days past due. Even if you don’t have home equity, you can start setting aside every month to put toward settlements. If you’re faithful with the savings plan, you can settle your debts in two to three years.

Avoid bankruptcy.

Many people who choose debt settlement are facing a Chapter 13 bankruptcy, which would require them to repay debts over a three to five year repayment plan. They don’t qualify for Chapter 7 bankruptcy which would allow them to have their debts cancelled or they want to avoid Chapter 7 bankruptcy because it would require them to give up certain assets. If you can settle your debts instead of filing bankruptcy, then you avoid having a bankruptcy on your credit report and public record.

Debt settlement isn’t as bad as it’s often made to seem. However, there are some bad debt settlement companies out there. If you decide to settle your debts, take time to choose a reputable debt settlement company or settle debts on your own.