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.

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.

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.

If you are consolidating your loans, the amount you finance will allow you to pay one bill instead of several different bills every month. The loan taken from a bank, credit union or other financial institution might be an unsecured loan that is considered a personal loan, or it might be attached to your house or other secured debt.

Credit Report

A good place to start if you are considering a debt consolidation loan is with your credit report. You need to request your credit report from all three agencies and check your information. First make sure your name, address and employment information is correct.

Then check each of the reported accounts and verify the balances, payment history and open or closed account information. If there are mistakes, report them to the credit agency and ask that they be corrected.

Cleaning up your credit report can take thirty to forty-five days, so make sure you start with this report. It is important that your credit report be as clean as you can make it because any loan you get to consolidate debt will have an interest rate based on your credit scores.

You can get a copy of your credit report free from many websites. One of the websites is www.annualcreditreport.com. Besides getting a free report from each of the three reporting agencies, you may be able to clear up some of the discrepancies online. Make sure you get all three reports, different creditors will report to different agencies and sometimes one agency will have erroneous information that another agency doesn’t list.

Understanding the Numbers

Once you’ve started the process of cleaning up your credit report, now you can start trying to figure out how much money you need and what makes the most impact to your bottom line.

A good place to start this process is www.moneycentral.msn.com. They have several tools that will help you make informed decisions about your situation. One of these tools is a calculator called Consolidate Your Debt Payment calculator. This allows you to make adjustments to how much you pay monthly on a loan and see how it affects your pay off time frame.

Another tool at this site is the Consolidate Your Debt Time Frame calculator. With this device you can enter different terms, say two years instead of three, and see how just changing the term of the loan commitment changes your payments and interest paid.

These calculators are useful if you know the details of what you will be looking for. Make a list of all the bills you are considering rolling into a consolidation loan. Make sure you have the total amount due and the current interest rate for each loan as well as the monthly payment. Include how many payments are left for each loan.

Then do some research by looking at your credit union or bank website. There will often be information on what the interest rate is now on personal loans. These posted interest rates usually reflect a higher FICA or credit report score, so depending on your personal rating, the interest rate may be higher by a few points.

Once you have these figures, use the calculator tools to get an idea of what rates and terms you need to get from a lender to make consolidating your debt a worthwhile option.

Loan Options

Payment wise, your best option is to either refinance or take a second mortgage on your house. If you can qualify for a home equity loan or cash-out refinance, the interest rates and payments will be the lowest with these options. If you have really good credit, in the early months of 2010 the interest rates for this type of loan could be as low as 3-5%. The downside to doing this would be tying your house to this type of loan.

The next best option for a lower interest rate is if you have a car or other asset that can be tied to the loan. If the car is paid off, consider financing it, or refinancing the car to include a few thousand extra to be utilized to pay off several of your small bills. This type of loan in early 2010 might be in the 5-14% range of interest depending on term and credit rating. You might look at loans that are secured by savings accounts. These can be in the 5% range if you have CDs or savings accounts to back them up.

The third option is to get a personal or signature loan. Generally these loans are for $5,000 and less and are at about 11% interest. But if you are refinancing credit card debt with an interest rate in the 20% range, it is still a viable option.

Managing the debt becomes easier, as now you are making one monthly payment instead of the several loans or credit card payments that you were paying before the consolidation loan.

Take Charge of Your Debt

In the first month of 2010, statistics from research firm TNS stated that 64 percent of us feel bad about the economy and our personal finances. This report went on to say that almost 70 percent of the consumers will work to cut down on personal spending within the first six months of the year.

Because people are worried about keeping their homes, paying higher taxes or staying employed, they want to be proactive in reducing their debt and are trying to manage interest rates and build savings accounts.

A popular option is utilizing a consolidation loan. The attraction for a consolidation loan comes with a reduced interest rate and smaller monthly payment.

Debt Reduction Plan

Utilizing the consolidation loan to reduce your debt is a simple formula. First you write down the loans you want to consider for this plan. Then you research what your current interest rate is, your overall balance for that loan and how much your monthly payment is.

Once you’ve figured out what you are currently paying and at what rate, you look for a consolidation loan for the amount you need. The loan may be an unsecured loan taken at a bank or credit union. This type of loan is generally for less than $5,000 and has a payback period of two to three years. Or you may be refinancing a car or other secured debt and adding in a couple thousand for the consolidation loan. A third option is to roll the consolidation amount into a first or second mortgage.

After you’ve received the money for the consolidation loan, you pay off the list of debts, starting with the debt with the highest interest rate. Now you have one, smaller monthly payment.

The next step is very important in the debt reduction plan. Take the amount left over. The amount that is the difference between what you were paying on those loans and the amount you are paying now. For instance, if the total of five credit card payments was $250 a month, and now they are consolidated into a loan that is $125 a month; your difference is $125 a month.

Add some of the extra $125 to the monthly payment of the new loan. Even $135 a month gives you $10 more towards the principle and can make a huge difference in how long it takes to pay off the new loan. Then, take at least part of the $115 that is left and put it in a savings account.

This only works if you stop spending in other areas. If you paid off five credit cards, consider canceling four of those cards and put the fourth one away for emergency purchases only. Choose the cards that have monthly fees or inactivity fees. Make sure that you ask the credit card company to report to the credit bureau that the card was canceled at YOUR REQUEST. Otherwise if they just cancel the card it might have a negative impact on your credit score.

Summary

Debt Consolidation is often considered an option when people are worried about the future. They start looking at their debt and trying to manage their outgoing expenses. Using debt consolidation as a tool to get out of debt is a viable process, but can cause more problems if not handled right.

It is important that if you get a loan to pay off smaller loans that you take the money and actually pay off those loans. Don’t get the money for consolidation and decide to go on vacation. This leaves you with all the old loans and a new payment. You‘d be surprised at how often this happens.

Also, once you’ve consolidated, don’t charge up more debt. Cancel credit cards, pay more money on the principle and start a savings account. Let Debt Consolidation be a tool in your cache of weapons to eliminate debt. Use it as a strategy that helps you reach your ultimate goal of living as close to debt free as you can get.

This process can incorporate one or more of those financial strategies. It is important that as you consolidate the loans, you understand what your goals are. Are you doing this to simply lower your payments and interest, or to get out of debt faster?

Fewer Bills and Lower Payment

One of the biggest advantages to a debt consolidation loan is having fewer payments to make each month. Generally the new payment will be smaller than the total of the bills you are replacing. Debt Consolidation loans can be taken out with a bank, credit union or other financial institution.

You end up with a smaller payment because you have a longer time to pay off your debt, and often the interest rate is better than some of the other loans, especially if you are including credit card debt. The new loan should have a fixed interest rate and it can be very beneficial to consolidate your debt if you have an interest rate that fluctuates if.

First Steps

Before you get a new loan, it is important to know what you have. Sit down and make a list of each loan that you want to roll into a consolidation loan. On this list include the monthly payment, the interest for the current loan and what balance is left on this loan. This way you know the total balance and what interest rate you need to make the consolidation loan worthwhile.

Personal Loan

The consolidation loan might be one that you get from the credit union or bank. These are usually unsecured loans. An unsecured loan is one that is tied simply to your good name and credit. There is nothing “securing” the loan. These unsecured loans are often called personal or signature loans. Generally these types of loans are taken out for $5,000 or less. Pay attention to the term and interest rate. The goal is to get a rate that is lower than the debts you plan to pay off and to be able to do this in less than two or three years.

Secured Loan

A secured loan means that the loan is tied to something. It could be as simple as refinancing a car or other secured debt and adding an amount on top of the loan that you get back as cash. Then you use this cash to pay off several small loan amounts.

Securing a debt consolidation loan can also be done as part of a first or second mortgage. This means that when you buy or refinance a house, or take out a second mortgage, you add the amount you need to cover your short-term debt into the purchase price or refinance package.

So the asset securing this type of loan is your house. This can have the biggest impact on monthly savings. But be careful, it means all that short-term debt is now being paid off over 15 to 30 years and if you default on the loan, you could lose your house.

Collateralization Of The Loan

This is a fancy word for “securing” your debt with an asset like your house. But remember, the collateral that you use to secure the loan could be a car, boat, or even a savings account or CD that you have at the bank who gave you the loan.

Banks and loan companies like to have collateral attached to a loan. This is why a secured loan will have a smaller interest rate than the unsecured or personal loans. If the loan is secured, it is much easier to come and repossess your car, boat or simply seize your savings account—than it is to take you to court and try and get a judgment if you don’t pay an unsecured loan. The lender has less of a chance of losing their money, because they can just take your collateral, so you get a better rate.

Advantages

If you have several credit cards with double digit interest rates and several thousand dollars worth of debt, a consumer debt consolidation might make a huge impact on your outgoing monthly amount. The biggest impact would be to roll this debt into your mortgage, where you should be able to cut that double digit interest rate into less than half.

Disadvantages

If you’ve rolled your debt into your first or second mortgage you will be paying off that debt and the extra interest for fifteen to thirty years depending on how long your mortgage is for.

Make sure if you get money for a debt consolidation loan that you pay off the original debts and don’t just spend the money. This happens more than you would think and people end up in worse financial difficulty than they started.

Most debt consolidation companies have ongoing relationships with lenders.  When you hire a consolidation counselor to help you, they will call your lenders directly and find out what the lowest amount of money you can pay per month is.  During this process, they will try to get your interest rates dropped and extra fees stopped.  In some situations, they may be able to negotiate a lower payoff amount for your line of credit.  After contacting all of your lenders like this, the counselor determines how much money is needed to pay off your lenders monthly.

That amount of money is charged to you.  Every month, the debt consolidation company will withdraw the set amount of money from your checking or savings account. They will then take those funds and split them among each of your lenders as the agreement has been made.  Usually, the debt repayment plan is designed to pay off your debt in the fastest amount of time possible.  This can happen because of the dropped interest rates and lower fees, plus the regular payments to your lender.

Many consumer consolidation companies will work as non-profits.  You will likely be charged a fee, but that fee is for administration costs only.  Other companies are for profit, meaning that they will take a fee for the services they offer to you.  Talk to several companies, of both types, to determine which is the best type of program for you.In addition to providing this service for you, the consolidation company will also work to stop lenders from calling you.  As long as you are enrolled in the program and making monthly payments to the consolidation company, they will work with you instead of the lender working with you.

When you enroll in debt consolidation companies, you will no longer have access to your credit accounts.  The accounts will be closed and you’ll be unable to use them.  You also must agree to not obtain any new credit during this time.  By doing this, you’ll protect yourself from accumulating new debt and failing to make payments to your current lenders.  Most debt consolidation companies do put marks on your credit report that you are enrolled in these programs.  It does look negative.  Yet, compared to nonpayment or over the limit fees, this is often the best option for borrowers.

Once you have paid off your debts through the debt consolidation company, you will be able to start rebuilding your credit through new loans and credit lines, assuming you use them wisely.  If you fail to continue the program for whatever reason, your lenders will begin collection activities against you for nonpayment of your loans.  This may involve legal action unless you work with them to make payments.  Some will consider debt settlement; others will demand payment in full.

Before you make a decision about whether debt consolidation loans like this are right for you, talk to a debt counselor.  Determine if you can work out a budget that is affordable to you and that satisfies your lenders.  In most cases, lenders will not offer consumers the same opportunities as they will offer you through your debt consolidation counselor.  This is yet another reason to consider the benefits of these opportunities to consolidate debt.

Consumer debt consolidation is an opportunity that helps many people to improve their credit situation.  It is an ideal way to get back on track when you have reached a point of being behind every month, missing payments and being unable to work with your creditors requirements.  Debt consolidation methods are specific in that the goal of them is to work through a counselor to find a solution in repaying your debt.  Consolidation companies do not offer you loans; they do offer you a way of working with your lenders that is beneficial to both parties.Debt consolidation loans are much different.  Loans will allow you to pay off all of the debt through a new loan. Consolidation loans are difficult to get, especially if you have poor credit scores or you have no collateral to back up the value of the loan.  Debt consolidation without loans is possible, through third party companies, both for profit and not for profit that work with you.

Who Needs Debt Consolidation Help?

Debt consolidation is right for many people.  It works well for those who are unable to keep up with their monthly credit card or personal loan payments.  It also works well for those who have high interest rates and are falling farther being in payments because interest charges are so high.  Debt consolidation is not an answer to those struggling with a mortgage or a car loan.  Since their assets secure these loans, lenders are not willing to work with you for these loan repayments.  Debt consolidation does work well when you cannot get lenders to work with you on repayment of your debts.  For example, if you are over your credit limit and can’t get caught back up, consolidation may be able to stop the extra charges.

Debt consolidation help is obtained by working through debt consolidation counselors.  Part of the process of getting into a debt consolidation program is working with the counselor to establish how well this program will work for you.  They will ask you to meet with them to discuss your finances.  They will first work out a budget for you, based on the current expenses you have.  Bring your checkbook register to help you.  Once your budget is worked out, the counselor will determine how much money you have left in your incoming balance to be used to pay off your debts.  This remaining about is then compared to what your credit card and personal loan debts are.  If the counselor can work out payment with your lenders for this amount of money per month, they will.  If it is not enough to cover those expenses, they will instead refer you to either increasing your income or refer you to bankruptcy.