Creative Debt Consolidation

Posted on February 17, 2010 by admin

Debt consolidation means rolling your smaller, higher credit card debt and loans into a larger, longer term and smaller interest rate loan.

If you are working on paying down your debt, the advantage to taking out some type of debt consolidation loan is to cut the amount of debt you have to pay each month. If your interest rates are lower, more of your money is going to principle than interest. Also, with the difference in what you were paying and the new payment, you have money to put against the loan and pay the principle off even faster. This can be a great tool for getting out of debt. There are several traditional methods for taking out a debt consolidation loan, and we will explore those briefly, but maybe there are a few options you haven’t considered. We will discuss a few of those options for debt consolidation at the end of the article.

Understand Your Debt

If you don’t know how much you are in debt or what interest rates you are paying, how will you know if any of the options make sense for you? Everyone’s situation is different, and it is important you really understand what you have before you sign up for something that doesn’t help your situation.

So write out a list that contains the account name, minimum monthly payment, interest rate and overall balance for every type of debt you have. Then go to a site like www.moneycentral.msn.com. They have tools like the ‘consolidate your debt time frame calculator’ that will allow you to play with the options and make an educated decision on what bills you should include, and which you should leave out. It will help you determine what interest rate you need and how long you need the loan for.

Traditional Debt Consolidation

There are many types of loans that you can get for traditional debt consolidation. These types include the following:

  • Cash-out Refinancing: This means you refinance your house and take all or a portion of the equity in cash to pay off other debts. The advantage of this type of loan is very low interest rates and the interest is tax-deductible. For this type of loan you need to understand the fees, appraisal costs and closing costs. The downside to this loan could be stretching payments out for 15 to 30 years. Figure the interest on the amount and make an informed decision.
  • Home Equity Loan: The advantages for this type of loan are similar to the cash-out refinance loan. They include larger amounts with a fairly low interest rate and tax-deductible interest. Make sure you get a fixed-rate loan. The term is usually at 15-years, but make sure to ask. Check the origination fee, the cost of appraisal and if you need title insurance, what it would cost.
  • Refinancing your car: It doesn’t have to be a car, it could be a boat, a savings account, or some other asset. The advantage to this type of secured asset loan might be the rate and shorter time period to pay the loan back. Say five years instead of fifteen or thirty with the real estate options. The downside to this is if you need a new car in a few years and owe more on the car than it is worth.
  • Personal Loan: A personal loan is an unsecured option. This might be called a signature loan or a personal line of credit. This type of loan might have an 11% or higher interest rate. But if you are paying 20% and more to credit card companies, this loan might still be a great option.

Non Traditional Debt Consolidation

In this day and age, it may pay you to get creative. Maybe this means borrowing money from a family member or friend. If you are considering this option, try a structured social lending site like www.virginmoney.com. This social lending site is provided by the owner of Virgin Air and Virgin Music. The site offers tools that will help you figure out an interest rate, provide the agreement in writing, and then help you set up a direct payment debit from your bank account to the family member that is lending the money.

The reason a family member might consider lending you money is that money market and CD rates are down. They aren’t making very much in interest on their savings accounts. If they lend the money to you, and you utilize a social lending site that allows you to compute interest and take a direct debit from your account, the family member can make a better return on their investment by lending the money to you.

Credit Unions

Consider joining a credit union even if you just start with a savings account. At a credit union you are a member. They often offer small holiday loans to their membership, or my credit union offers skip-a-payment on my car loan. This means I can use these options several times a year and pay off higher interest loans. It is a smaller chunk at a time, but eventually it adds up.

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For Consumer and Student Loans

Posted on February 17, 2010 by admin

Debt consolidation is often a tool used to restructure both consumer loans as well as Federal student loan repayment.

Similar to other debt consolidation, student debt consolidation means that you are going to take all the student loans that you have and consider rolling them into one student loan. The reason to do this is to consolidate and get a lower interest rate with a smaller monthly payment.

If you are considering debt consolidation for any type of loans, including your student loans, make sure you do your research and ask appropriate questions. Start by listing out the student loans you currently have, the amount left on each loan and the interest rate you are paying. Make a notation if the interest rate fluctuates or climbs over the years. Do this with your other loans.

Federal Student Loan Consolidation

Student loans have to be looked at separate from your other debt. They cannot be consolidated with any other loan. If you have Federal Student loans you may have a variable interest rate on these educational loans. Make sure you understand what your loans have.

The Federal Government offers a Direct Consolidation Loan that is fixed for the life of the loan. The loans new rate is based on the loans you have. It is figured on the weighted average interest rate of all the loans you currently have, and the number is rounded to the next one-eighth of one percent. The rate can’t be more than 8.25 percent.

For more information you can go to the federal student loan website at: http://www.ed.gov/about/offices/list/fsa/index.html. Or you can also check out: http://www.loanconsolidation.ed.gov/. This site has calculators and lots of information on how to get a loan, and if consolidating your student loans is a good idea.

Consumer Loan Consolidation – Unsecured

An unsecured loan can be used to consolidate credit card debt, medical liabilities or other loans. Personal loans are offered under many names. They are sometimes called signature loans, or consumer loans. Generally they are for $5000 or less.

Different lending institutions may call them different things, but the end result is that they are unsecured loans. This is a loan granted for personal use that is not tied to any asset or thing. Getting the loan is based on your credit report and your ability to make payments on the loan and pay it back during the negotiated term.

There is information and calculators available to help you figure out if consolidating debt is right for you. One place for help is www.moneycentral.msn.com. This site offers debt calculators that will help you figure out the best way to structure payments by time and interest rate. There are also ways to help you figure out your debt ratio. The site includes all sorts of tips and tools to help you make the best decision when it comes to debt consolidation.

Consumer Loan Consolidation – Secured

A secured loan for consolidation means that the loan is guaranteed by some type of asset. This asset can be savings accounts or CDs, or personal property like a car, boat or other asset. The secured credit can also be taken on your personal residence by adding an amount to the first mortgage or refinancing to get cash out of the equity. It can also come in the form of a home equity line of credit or second mortgage.

Secured credit will usually provide a much better interest rate and a longer time frame to pay the loan back. This makes the most impact in a debt consolidation effort.

Credit Score Management

No matter what type of loan you choose for debt consolidation, you will want to manage your credit scores and your credit report. This is important because any financial institution will base granting the loan and the interest percentage on how good your scores are.

You should request your credit reports at least annually and clear any discrepancies as soon as possible. Once you see a mistake on the credit report it will generally take thirty days or more to clear the mistake from the report.

There are many sites that offer free credit reports. Some sites will even provide free FICA scores, but be careful. Sometimes these services are free only for a limited amount of time. The services may start charging within a few days of getting the report for services like credit protection. One of the websites that provides a truly free report once a year is: www.annualcreditreport.com. This site also allows you to submit problems online.

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Debt Consolidation Questions

Posted on February 17, 2010 by admin

Instead of paying several separate bills each month, many consumers consider getting a debt consolidation loan to lower their interest and monthly payments.

A debt consolidation loan can be used by consumers to combine their liabilities and loans into one loan. This often decreases the overall interest rate that they pay and when added to the fact that the payments are sometimes paid over a longer period of time, it can greatly reduce the overall amount paid per month.

How do I get started?

This is the easy part. To get started you need to know what you have. Make a simple list that includes the name of the accounts you are interested in rolling into a consolidation loan. Now add the monthly payment for each account, the total balance for each credit card bill or other liability, and the interest rate you are paying for each separate account. Figure out how many payments are left on each one.

Now you know how much money you will need to cover all these bills. And you will have a list of their interest rates so that if you get a consolidation loan at say 11%, you will want to include the loans that are higher than this percentage, but probably leave the lower percentage loans out of the mix.

You might want to review your credit report. This way you can verify the information and clean up any errors while you looking into different options. Cleaning up mistakes can often take thirty to forty-five days so start this as soon as you can. A good place to access your credit reports for no charge is www.annualcreditreport.com.

What type of loan should I get?

This will depend on many things, but let’s start with the amount of money you need to cover the loans on your list. If you need $5,000 or less, you are a good candidate for an unsecured loan. This means you can talk to your bank, credit union, or other financial institution about getting a personal loan. These loans generally have to be paid back in two to three years, but can sometimes be taken out for up to five years. Because this loan is unsecured, it will have the highest percentage rate for interest. Check and see what interest rate you can get for this loan and compare to your list and what you are paying now.

The next option if you have $5,000 or less might be to secure the loan with savings CDs or a savings account. This could bring the percentage rate paid down into the 5% range. The downside to securing the loan with a savings account or CD is that the amount you still owe on the loan is “secured” in the bank and you can’t withdraw or utilize this money. So if you have a loan for $3000 and have $4000 in savings, you can only access the difference of $1000. The good news with this type of loan is that as you pay down the principle, you get access to more of your money. If say a year into the loan the principle balance is $2000, then you would have access to $2000 of your savings account.

For amounts that are $5,000 or less, you might also consider securing the loan with a car or other asset. If the car is paid off, look at getting it financed for the amount you need. Or possibly refinance an existing car loan and if you owe less than the car is worth, and get a couple thousand extra to use for debt consolidation.

If you need more than $5000, you will probably need to refinance your home or take out a second mortgage for this amount. Securing a loan with your house will give you the lowest interest rate and the most amount of time to pay it back.

Remember to be careful with secured loans, if you default and can’t pay the loan, the lender can seize your car or house to collect the money owed them.

Is Debt Consolidation a good idea?

Every situation is different. There is a long list of pros and cons to weigh when you are considering consolidating debt. Run the numbers by looking at your list and considering what you would pay for the loan now if you kept it as is, versus what you will pay in principle and interest if you move the loan to a consolidation loan.

You might cut the interest, but if you add ten years to the payments, is it really saving you anything? What do you plan to do with the monthly savings? Is part of the savings going to paying off the principle faster?

If you are really confused, you might consider taking to a credit counselor. These people are often low or no cost and can help you decide your options. A good place to start finding a counselor is at http://www.nfcc.org/. This is the National Foundation For Credit Counseling and they will help find a responsible and accredited counselor in your area or online.

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