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.