Consumer Debt Consolidation

Debt consolidation can be used as a strategy to combine separate loans and liabilities into one loan that should have a lower interest rate and monthly payment.

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.

Debt consolidation is sometimes used as a tool by consumers, reducing debt with lower interest rates and smaller monthly payments; they can now pay down the principle at an accelerated rate. If they roll higher interest loans into a smaller interest loan, they can utilize the money they save each month to pay down the principle on the loan. By doing this, they can often pay the new loan off in a shorter period of time than the loan was taken out for.

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.