Debt Consolidation Loans » debt consolidation

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.

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.

The 4 Types of Debt Consolidation

admin — Fri, 31 Dec 2010 05:51:13 +0000

When debt gets to the point that it becomes unmanageable without professional help, it is important to take care of the problem before it escalates. The fact of the matter is it is not all that difficult to end up in a situation where debt gets the best of you. One purchase on credit too many and it suddenly may seem impossible to make the minimum payments each month.

In order to prevent this from happening, it is important to get in touch with professional for help. There are several different types of professional help available, however. The four most common solution consumers today are seeking are credit counseling, debt settlement, unsecured debt consolidation loans, and secured debt consolidation loans.

Credit counseling is an option where you get in touch with an organization that will help you pay your credit card bills. These organizations will negotiate with creditors on your behalf, and in most cases, they will be able to get the interest rates reduced and the overall monthly payments lowered.

You will then start making payments directly to the credit counselor, who then redistributes the funds to your creditors. When you take care of the problem in this way, you can reduce your overall costs all while enjoying the convenience of one monthly payment.

Debt settlement is different from credit counseling in that it actually reduces the amount of money that you owe. The biggest downside with this option is in order for creditors to be willing to negotiate the amount of money owed, the account has to go into a delinquent status first. This means that, while debt settlement ultimately is the solution that saves you the most amount of money, it also does a great deal of harm to your credit score. In terms of how the process works, a debt settlement company sets up a trust account and each month you begin making deposits into each month. Once the amount in your trust account reaches about half of your total debt, the debt settlement agency will negotiate with one of your creditor to make a lump sum payment for about half of the debt while forgiving the rest of it.

The final option is to take out a debt consolidation loan. This is when a bank or credit union give you a loan to pay off all the rest of your debt. You then pay back the loan to the bank or credit union. In most cases the interest rate will be lower and the monthly payments will be less than what you’re currently paying. The best interest rates typically come from secured debt consolidation loans, in which you use major assets such as a home or car as collateral. This can increase your exposure to risk, but it can also reduce your monthly payments or the term of the loan.

Before you choose any of these options, an important first step is to evaluate your budget and see what you can afford on a monthly basis. If it turns out that you cannot afford more than 1.5% of your debt load as a monthly payment, then in all likelihood bankruptcy is your best option.

This article was written by Robert Zangrilli, the CEO of Franklin Debt Relief. Franklin Debt Relief is a leading provider of debt settlement programs based in Chicago, Illinois.

Comparing Debt Settlement to Other Debt Solutions

Shaun Connell — Tue, 28 Dec 2010 06:20:49 +0000

Consumer credit counseling programs aim to have your debts fully repaid within three to five years. To reach this goal, you make monthly payments to the credit counseling agency. Then, the credit counseling agency divides your payments and sends them to all your creditors.

Under a debt settlement program, you pay off your debts. Instead, your goal is to settle your debts for 50% of the balance due and have your debts taken care of in less than three years.

To commit to a credit counseling program, you must be able to consistently make monthly payments. Often, people can’t qualify for credit counseling because of a cash flow problem. In that case, debt settlement can be a better option.

Debt Settlement vs. Debt Consolidation

Through debt consolidation, you’d use a consolidation loan to pay off your debts, then repay the loan. The amount of time it takes to pay off a debt consolidation loan depends on the terms of the loan. It could take as little as few as three years or as many as 20.

You might choose debt consolidation over debt settlement if you’re struggling to pay off your debts and you have available home equity that you can use to pay off your debts. It’s possible, but not as easy, to consolidate your debts with an unsecured loan. This is often preferable because you don’t have to put your home on the line, but it requires you to have good credit.

Debt Settlement vs. Bankruptcy

People who choose debt settlement have often reached the point that their only other option is bankruptcy. Through bankruptcy, you can either have your debts discharged (Chapter 7) or repay them through a three- to five-year repayment plan (Chapter 13). Bankruptcy is a legal process that may require you to go to court to deal with your debts. The bankruptcy filing will stay on your credit report for seven years and on record with your court forever.

You might choose debts settlement over bankruptcy if you want to keep the court out of your finances and if you want to avoid the life-long stigma of having filed bankruptcy. However, it may be a better option to choose Chapter 7 bankruptcy over debt settlement.

Choosing a Debt Solution

There’s no single debt solution that fits every solution. If debt settlement is the only viable solution for dealing with your debt, don’t let negative feedback discourage you.

Debt Consolidation Tips

Heather Pedersen — Tue, 21 Dec 2010 05:10:53 +0000

If you think you’re alone in your debt problems. Think again, debt is more common than ever these days. While there are many households in America that don’t have any debt at all, there are quite a few households that have tens of thousands of dollars in unsecured debt.

If you’re tired of carrying around all that debt, it’s time to take action. Debt consolidation may be thing that helps put an end to your debt once and for all.

Choose a debt consolidation loan wisely. Depending on your credit history, you may not have a variety of debt consolidation loans to choose from. In fact, if you have a bad credit history, you may be limited to a home equity loan or borrowing from your 401K. No matter what your options are for a debt consolidation loan, you should choose one that will let you pay off all your debts at a lower interest rate.

Get the rest of your finances in order. When you’re trying to get out of debt, it’s not just your debt you should focus on. You have to also take a look at your entire financial picture if you want debt consolidation to be successful. That means examining your spending, putting a budget in place, building an emergency fund, and spending less than you earn. Without a strong financial foundation, you’re more likely to get right back into debt.

Make your money stretch. The more money you can squeeze from your budget, the more you can put toward other financial goals like paying off your debt, building an emergency fund, and saving for retirement. You can stretch your money further by getting rid of unnecessary services like your cell phone internet package or premium cable channels. Consider cutting back on your groceries, turning off lights to save energy, and clipping coupons. Anything you can do to save money will help your debt-free journey.

Avoid taking on more debt. When you pay off your credit cards with a debt consolidation loan, you’ll have a load of credit available to you. Many people fail to get out of debt after a debt consolidation loan because they just use their credit cards to get into more debt. So imagine having twice the amount of debt you have now. If you want to avoid that situation completely, close your credit cards until you’ve paid off your consolidation loan. As an exception, you can leave open one credit card only, preferably one with a lower credit limit.

Debt Consolidation Can Work

Debt consolidation can work for you, but it’s up to you to make it work. Be sure to consider your holistic financial picture for success with your debt

Benefits of Consolidating Debt With a Home Equity Loan

Shaun Connell — Sat, 18 Dec 2010 04:35:28 +0000

A home equity loan is a type of loan you borrow using your house as collateral for the loan. If you’re having trouble with your debt payments, you may consider using a home equity loan to consolidate your debts. Using a home equity loan has several benefits over other debt consolidation options.

Larger Loan Amounts

Because the loan is secured by your home, you can often borrow more money than you can with other types of consolidation methods – like a personal loan or balance transfer. This is especially beneficial if you have a large amount of debt that you’d like to consolidate.

Fixed Interest Rate

Home equity loans have a fixed interest rate and your interest rate won’t change over the life of the loan. The fixed interest rate also lets you have a fixed monthly payment that doesn’t change. If you use a balance transfer or home equity line of credit to consolidate your debt, you’ll likely end up with a variable interest rate that changes periodically.

Low or No Fees

Depending on which lender you choose, you may not have to pay any application fees or closing costs with a home equity loan. The elimination of these fees makes it easier to move forward in the loan process and makes a home equity loan more reasonable than a second mortgage or refinance.

Loan Terms Up to 25 Years

While you probably shouldn’t extend your debt consolidation loan out to 25 years, it’s nice to have the option. Having a longer repayment period lets you pay a lower monthly fee, but you’ll also pay more interest over the life of the loan than if you had a shorter repayment period. Plus, the idea behind debt consolidation is to pay your debts off quickly rather than dragging out the process.

The Interest is Tax Deductible

The IRS usually allows you to deduct the interest paid on mortgages and even home equity loans. You won’t get this option if you’re paying interest on a credit card balance or even another type of loan. The tax deduction could lower your tax liability and even let you get a bigger refund or have a lower tax bill when you file taxes. It’s a good idea to consult with a tax professional to learn any tax implications from a home equity loan.

Borrowing a Home Equity Loan

As with other types of loans, it’s a good idea to shop around to make sure you get the best terms on your home equity loan. Make sure you understand the terms of the contract to avoid any penalties.

How to Know When Debt Consolidation is Right for You

Shaun Connell — Tue, 14 Dec 2010 05:37:42 +0000

The debt consolidation method for managing debt doesn’t fit every situation. For some people debt consolidation is the best option; the one that helps them solve their debt problems with the least cost and trouble. However, for others, debt consolidation simply won’t work.

Home Equity Debt Consolidation

To consolidate your debt with a home equity loan or second mortgage, you need to have enough equity in your home to cover your unsecured debts. You should actually have more equity than the total amount of your debts since you’d only be able to borrow against a percentage of your home’s equity. A home equity loan is a good option if you have decent – but not bad – credit. It’s often the best deal you’ll get without having perfect credit.

Debt Consolidation Loan

If you don’t have enough equity in your home to consolidate your debts, then you may qualify for an unsecured loan for a bank. These loans are often called signature loans because it’s your signature that guarantees the loan. The drawback is that you can only borrow a certain amount since there’s no collateral for the loan. Many banks will only let you borrow $25,000 for an unsecured loan and you’ll only get approved for a good interest rate if you have good credit.

When Debt Consolidation is a Bad Option

Without available home equity and good credit to qualify for an unsecured loan, debt consolidation probably isn’t an option for you.

Debt consolidation is also a bad idea if you’re having an overall hard time making your debt payments. Debt consolidation loans can lower your monthly payments, but the decrease in your payment may not be enough. Before you commit to a new loan, find out what the payments will be to see if you can make them. If you can’t afford the new payments, you should consider another debt management option.

Other options for managing your debt include paying on your own, credit counseling, debt settlement, and bankruptcy. You may also be able to work out a hardship program with your creditor, but this option typically isn’t available until you’ve fallen behind on your payments. If you’re already delinquent, check with too see if you could afford hardship payment. Or, if you’re trying to keep from becoming delinquent on your payments, check out credit counseling. If you can’t afford any monthly payments, consider debt settlement and bankruptcy.

Clearing Up the Confusion Between Debt Consolidation and Credit Counseling

Shaun Connell — Tue, 07 Dec 2010 03:19:17 +0000

Often, the terms debt consolidation and credit counseling are used interchangeably when they really couldn’t be more different. True, they both aim to get you out of debt with a single monthly payment, but the execution is different.

What is Credit Counseling?

When many people describe debt consolidation, they’re actually describing credit counseling. The goal of credit counseling is to put you on a debt management plan (DMP) with your creditors.

The DMP is a three-to-five year (usually) repayment plan that lowers your credit card interest rate and monthly payment. The credit counseling agency acts as an intermediary between you and your credit card company, accepting your lump-sum payment and sending out payments to each of your creditors each month.

You may pay a fee for credit counseling services, though many of the reputable companies have reduced fees for people facing financial hardship and some companies don’t charge a fee at all.

What is Debt Consolidation?

Debt consolidation involves combining all your debts by paying them off with a loan. The loan could be a debt consolidation loan, another credit card, or a home equity loan. Once you pay off your existing debts via debt consolidation loan, you no longer make any payment to your creditors. Instead, your new monthly payments go toward reducing your new debt consolidation loan.

With both debt consolidation and credit counseling, the debt is still there. Debt consolidation shifts the debt into a single once place while credit counseling just shifts the payment.

The Risk of Available Credit

Debt consolidation can be risky, if you’re not careful. Once you use the consolidation loan to pay off your old credit card balances, you suddenly have a wealth of new credit available (assuming your accounts are in good standing). You could easily rack up another set of debt, in addition to your debt consolidation loan, if you leave those accounts open.

On the other hand, when you’re enrolled in credit counseling, your credit card issuers typically don’t let you use your credit card, even as your payments free up available credit.

How Your Credit is Affected

There was a time that credit counseling affected your credit score, but that isn’t the case anymore. However, when you’re enrolled in credit counseling there is a note on your accounts that says they’re being managed by a credit counseling agency. While this note won’t affect your credit score, a lender who manually reviews your credit report may turn you down because of credit counseling.

With debt consolidation, there are no additional notes on your credit report. Anyone who reviews your report simply sees an additional loan on your credit report.

Which One to Choose?

Debt consolidation may be a batter option for some people, especially those who make too much or to little money to qualify for credit counseling. But, on the other hand, credit counseling could be the only option for someone who can’t qualify for a debt consolidation loan and who doesn’t have enough equity in their home to get a loan. Whether you choose debt consolidation or credit counseling depends on your unique circumstances.

How to Start a Debt Consolidation Program

Heather Pedersen — Wed, 24 Nov 2010 13:53:59 +0000

Many people find themselves trapped by debt, and constantly battling their financial struggles. Sadly, many people are also unaware of how easily they could change their life for the better. To do so will take time, and commitment, but once you get on the right path, it’s worth it. So let’s cover a few of the basic ways you can gain back control of your financial status.

Financial Management: How To Get Control Over Debt

When it comes to debt, one of the safest things you can do to get ahead, is to apply for a debt consolidation loan. These loans are an excellent way to organize your debt, and gain a new perspective on paying it off for good. With the consolidation loan, all of your debt will be consolidated into one simple payment each month. That way you don’t have to worry about juggling multiple payments, and getting behind.

Also, another great advantage to the consolidation loan is that the consolidators will be working along side you to help you get out of debt. Their goal will be to advise you on making the right choices, and keeping up with payments. They will also be working to help lower your interest rates. With a lower rate, you will be able to get ahead on your payment, and begin making great progress.

Financial Management: What To Do With Your Cash Flow

Another way to get ahead on your financial situation, is to focus on saving your money. Start a savings account, and make it your goal to set aside a percentage every single month. Over time, this money will accumulate, until you will have a solid savings set aside for the future. That way you always have money set aside for tough times, and won’t have to rely on credit cards.

It is also important for you to learn a few simple ways to make extra money. For example, there many paid survey programs that you can participate in. Basically, you fill out information regarding products on a regular basis. Then you are give a small payment for your work. There are also ways to earn by learning to design web sites, blogs, and graphics. Find the option that best fits your lifestyle.

Financial Management: Closing Details

Take your time in working towards a more solid financial future, that is debt free. It’s the best financial decision that you can make.