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The Dos and Don’t of Loan Consolidation

Stamp Shows Consolidated Loan approvedIf you’ve watched TV for more than an hour or spent any time at all on the Internet you’ve undoubtedly seen all those ads from those companies that would just love to help you consolidate your debts to “cut your payments in half,” “reduce your interest payments”, and “help you become debt free.” This can all seem very tempting especially if you feel your billfold is hemorrhaging money due to your debts. The fact is combining all of your loans or credit card debts into a new loan with a lower interest rate and better payments can make perfect sense. Sadly enough, it doesn’t always work out like that. The fact is that many people who consolidate their debts end up paying more than they would have otherwise. An alarming number of borrowers that get home equity loans end up losing their houses. In addition, many of the so-called “consolidation” programs are not really loans at all. Plus, debt consolidation has a sort of bad reputation and in some cases rightfully so. Still, if you pay attention to these dos and don’ts you might be able to benefit a lot from consolidation.

Do get your credit report and FICO score

Whether you’re aware of this or not, your ability to get a loan and your interest rate will depend on your credit reports and your FICO score.

There are three credit-reporting bureaus – Experian, Equifax and TransUnion. They are required by law to provide you with a free copy of your credit report once a year. You can get your report from these bureaus one at a time or all together on the site www.annualcreditreport.com. The reason you’ll want to get your reports is because they could contain errors that are adversely affecting your credit score. You need to go over each report very carefully. If you do find errors, you’ll need to write the appropriate credit bureau and dispute the items.

Your credit score is a three-digit number that was created by the company now called FICO but until a few years ago was known as Fair Isaac Corporation. Your FICO score is a mathematical representation of your credit reports. It’s created using an algorithm that only FICO understands. You can get your score at www.myfico.com, from one of the three credit reporting agencies or from websites such as Creditkarma.com. If you have a Discover card you’re probably getting your credit score every month along with your statement. Lenders generally look at credit scores in ranges as follows:

  • Between 300 and 499 – Bad credit score
  • Between 500 and 579 – Poor credit score
  • Between 580 and 619 – Low credit score
  • Between 620 and 679 – Average or OK score
  • Between 680 and 699 – Good credit score
  • Between 700 and 850 – Very good or excellent credit score

If you find you have a credit score of 680 or above, a consolidation loan might be a good option.

Don’t fail to investigate other options

Before you get yourself tied up in a consolidation loan with a term of seven or even 10 years, be sure to check out your other options. If your goal is to save money and you’re not in a really bad financial situation, just pay off your debts faster by prioritizing them. This is called snowballing your debts. It is where you concentrate on paying as much as you can each month on the debt with the highest rate while making sure you continue to make the minimum payments on your other debts. This has helped many people become debt free within two years or less.

Do contact your credit card company

If you have relatively good credit call your credit card company and see if you can negotiate a better interest rate. In the event that they refuse to give you a lower rate, consider transferring your balances to a credit card with a lower long-term rate.

Don’t do a balance transfer without knowing all the facts

You could transfer your high-interest credit card debts to a 0% interest credit card. This is a card where you pay no interest during an introductory rate that can be anywhere from six months to 18 months, which gives you a sort of time out during which you could concentrate on paying off your balance. If you don’t get your balance paid off before your introductory period ends, you’ll have to start paying on it and your interest rate will likely skyrocket to 19% or higher.

Husband and wife happily talking to another personDo try a credit-counseling agency

There is probably a reputable credit-counseling agency where you live. If so, it should be able to provide you with either free or low-cost advice on how to manage your debt. You will be assigned a counselor that will review your finances, help you prepare a budget and provide you with tips for getting your finances under control.

Don’t sign up for a debt management plan

Your credit counselor might try to talk you into a debt management plan. Don’t agree to this without understanding it could take you as long as five years to complete it and you might have to give up all your credit cards.

Do talk with your mortgage holder

Reputable mortgage companies will usually work with you if you’re having a temporary problem. As soon as you see that you’re having trouble, call the company. It may be willing to temporarily suspend your payments, accept reduced payments for a period of time or let you pay interest only. Alternately, you might extend your term or the amount of time required for repayment, which would reduce your payments.

However, your best bet might be to totally refinance the loan. For example, there is a federal program called HARP (Home Affordable Refinance Program) where you could refinance and lower your payments even if you owe more on your house than it’s worth.

Don’t borrow from your life insurance

If you have a whole life policy, you could borrow against its cash value. This is usually a low interest loan that would get you quick cash to pay off your debts. However, there can be tax implications on the money you borrow. Plus, if you don’t repay the loan, the money will be subtracted from the amount your beneficiary receives.

Do try to pay off your debt quickly

One of the downsides of a consolidation loan is that you may have lower monthly payments but your repayment will be spread out over a longer period of time so you’ll be paying more, sometimes a lot more, on a consolidation loan then you would have to otherwise. Figure out your budget and then set the monthly payment on your loan as high as you possibly can. The quicker you pay off that loan the more money you’ll save and the faster you’ll be out of debt.

Don’t get the wrong type of loan

It’s important to understand there are two types of debt consolidation loans – secured and unsecured. Second mortgages, home equity loans and secured lines of credit are secured loans – that is an asset such as your house secures them. These loans usually have lower interest rates than the unsecured ones. In addition, if you get a home equity loan the interest you pay on it will probably be tax deductible. Of course, if you fall behind on a home equity loan, you could end up losing your house.

Unsecured loans can be a better option because you don’t have to risk any assets such as your house. If you have decent credit you should be able to get one of these loans at a good interest rate. But if you have poor credit you may find that you’ll get a low rate only with a secured loan.

Do shop around

Finally, make sure you get quotes from several different lenders and compare the terms and the interest rates very carefully. Your best bet is often your own bank or credit union – especially for personal or unsecured loans. But it’s always a good idea to shop around. When you do this, be sure to get your quotes in writing so you can compare lenders side-by-side. And make sure you understand all the fees associated with the loans as well as their terms and conditions.

Three Ts Of Debt Consolidation Denial

Problematic consumerDebt consolidation is a financial options offered by numerous lenders in hopes of being able to encourage the borrowers to pay back debts. The program makes it easy for the borrower to make the payments and get up to date with the lender. It is also a very valuable tool of lenders and even the government in addressing delinquency and default in debt and loan payments. It helps consumers solve multiple loan problems as well.

The lenders offer the program to be able to close several loans of the borrower to enable them to concentrate on one payment amount every month. It also pays-off the other loans and does not reflect settlement in the credit score. As most people have become aware, settlement damages the credit score by reflecting that the borrower was not able to make the payments and had to settle with the lender to pay off the debt at a reduced amount.

As consumers troop to different lenders to be assessed for debt consolidation, they are hopeful that their application would be approved to be able to do away with the nuances of payment for several types of loans. It can also give them a little more elbow room when the monthly payments goes down to be able to start building up the emergency fund or put more for retirement amount.

Debt consolidation denial

As the consumers sit down and wait for the approved loan amount to consolidate their several loans, new interest rate to be used and the new monthly payment, the loan officer might get back to you with a denied application. There are debt consolidation techniques but at this point, this is tough if you are already counting the ways how debt consolidation will work to your advantage. Some of the most common reasons for this debt consolidation denial are:

Too many loans

The lender might be under the presumption that you are adding on more loans to your existing debt. As soon as they fire up the computer, they will see all your existing financial obligations and might deny your application for the loan. They might be quick to the draw and draw the conclusion that you will not be able to meet all the payments if they approve the loan.

As your objective is debt consolidation, you would need to explain to the lender that the very reason you are taking out the loan is to pay off the other existing loans. It is not to add up to your existing financial payments. If they realize your plan, they just might approve of the loan. Again, this is still not an assurance of approval because some lenders are skeptics and will assume the worst – that you are just trying to squeeze out a loan with no plan of repayment.

This is not always the case but it is a possibility. If the lender would not agree to your plan, you can look for other lenders that would be open to your financial objective. It is not the end of the world if you get rejected by one lender. It is actually an opportunity to do a financial audit and see where you can make some improvement before approaching another lender to talk about debt consolidation.

Too low income

One of the primary things the lenders will look at is your ability to pay. This includes income from employment or income from a business a venture. If you are denied because they conclude that you do not have enough cash inflow to meet the payment requirements, then you can double check your income sources. You might have overlooked one source or forgot to declare income that is coming from an investment.

If your lender still determines that your income is not enough, it would be best to sit down and go over your income and expense budget. There might be something that you need to closely look into like missed payments or missed income. It might be the reason that you are still in debt – you need better money management.

Too risky Credit score

As you approach private lenders to take out a loan to consolidate your debts, another consideration is your credit score. This is especially tough because if there is already financial hardship, chances are your credit score would have already been affected. And the same reason why your credit score is suffering is what you hope to correct with your debt consolidation.

This is a tough call for the lender because the lower your score, the higher your risk, the lower your chances of being approved for the loan. One way lenders would agree to granting you a loan is if you agree to a high interest rate. This is meant to cover their investment risk and be assured of earning enough in the beginning to cover risk of payment default.

These are the most common benchmarks of lenders to assess if you are a good candidate for debt consolidation. If there are any denials on your loan application, look to check these three items and talk to your lender on how to go about your debt consolidation target.

Here is a video on debt consolidation:

Steps after debt consolidation

If you are successful in getting a debt consolidation loan, this is a great start in getting your finances back on track. This could help you make your monthly payments easier, send out lower check amounts for payments and not miss out on any loan or debt payment. But with debt consolidation, here are some things that a borrower would need to look into.

  • Pay-off loans. It is important to use the loan meant to consolidate your debt to do exactly just that – debt consolidation. You need to pay off all loans in order to enjoy the benefits of consolidating your debt all in one payment. Investments are a good idea but not for this specific purpose. If the target amount does not pan out, you will be in deeper financial hole. You will be stuck with your original loan payments with the addition of the new loan meant for consolidation.
  • Focus on payments. When you start debt consolidation payments, you need to keep at it and try your best not to go into delinquent or default payment status. Debt consolidation is meant to help you get out of debt but if you do not make the payments, you will fail to reap the advantages of making single monthly payments for all your previous loans.
  • Extra payments. Using debt consolidation usually carries a long repayment period. One great financial move is to make extra payments to your loan. If the lender will allow it, send it to principal payments. Even Azcentral.com is suggesting thsi move to pay down mortgage loan. This will result into shorter payment term and save you payment in interest in the future. It will also make you feel better that you are lowering down the actual amount of the money you borrowed rather than the interest.

Debt consolidation is a great financial option for people trying to streamline monthly payments. This is usually more advantageous for consumers that are able to meet at least all the minimum payments on all the debt and loan payments. It guarantees one monthly payment ensuring that the borrower is able to manage payments monthly and not miss out on any financial obligation.

3 Reasons To Consolidate Debt And 3 Reasons Not To

woman looking at a lot of billsFinding your way towards a successful debt freedom begins with your choice of debt solution. There are many ways for you to get out of your credit problem. You can simply consolidate debt or take the more drastic measure of bankruptcy. The challenge is not in finding a program but in choosing which one is the best option for your particular financial situation.

It is evident in our society today that we need help with our debts. According to the latest Household Debt and Credit Report from the Federal Reserve Bank of New York, the household debt grew by $129 billion from Q4 of 2013 to Q1 of 2014. The report published on the NY.FRB.org revealed that this growth is fueled by the increase in mortgage debt, student loans and auto loans. The total increase from these three type of debts amount to $159 billion but it is offset by the decline in HELOC and credit card balances – which amounts to $27 billion. While the debt that we have today is still 8% lower than the peak in 2008 ($12.68 trillion), $11.65 trillion worth of household debt is still a big amount to deal with.

The same report from the New York Fed also revealed that although the debt is rising, the delinquency rate is low. This is a good indication that people are borrowing more but they are in control of their payments.

However, the question remains: for how long can be keep the upper hand when it comes to our debts? A lot of us are one emergency away from a financial crisis. It is not only the amount that we need to be wary of – it is also the fact that most households deal with multiple debt situations.

Reasons why you should or should not consolidate your debts

One of the most popular ways to deal with a credit situation is to consolidate it. When you consolidate debt, you try to do three things:

  • You simplify your debt payments by combining it into a single payment scheme.
  • You restructure your payment plan into a longer period.
  • You aim for a lower interest rate.

Debt consolidation may seem appealing but you need to determine if it is the right course for you. No doubt, it is a legal and effective way to get out of debt but there are pros and cons that will have to be studied and analyzed before you make a decision.

To help you out, here are three reasons why you can and cannot use this debt solution to get out of your credit problem.

Choose debt consolidation if…

  • You can afford to pay off all your debts. How can you pay off debt if you do not get paid enough? This is an important question that you need to ask yourself before you opt for this debt solution. Debt consolidation only restructures your debt load. While it can successfully arrange a lower monthly payment, it will not reduce the overall debt that you owe. You need to make sure that whatever payment plan you will be coming up with can be supported by your monthly income – on top of the basic needs you need to spend for.
  • You can afford to pay your debts for a long time. Not only should your income be enough, it also has to last for a long time. When you consolidate debt, you are able to lower your monthly payment because you stretched your balance over a longer payment period. If your job is not stable, it may be tough for you to sustain your contributions every month. You need to ensure that your money will come in consistently – even when an emergency arises.
  • Your can afford to pay off a higher interest amount. The rate may be lower but if the payment period is longer, the total amount of interest will be higher. It may seem like you are saving but if you compute the overall interest amount that you will end up paying for, you will realize that it is actually a lot bigger. Not only that, the lower interest rate is not always a guarantee. It will be dependent on the specific program that you will use to consolidate debt, It is your aim, but it does not always materialize for everyone.

Do not choose debt consolidation if…

  • You do not know why you are in debt in the first place. In daveramsey.com, the very blunt financial adviser said that debt consolidation is dangerous. It may get you out of debt but it is only because you treated the symptoms of your credit problem. You did not go to the root cause of the debt. Because of this, Dave Ramsey believes that you will still fall into debt in the future. When you opt to consolidate your debt, you need to find out what caused it in the first place. Was it overspending or a small income? You need to work on this to keep yourself from debt in the future.
  • You do not have a steady and stable income. We have already discussed why you need to have a steady and stable income. Your debt will not go through a debt reduction. You will only restructure your debts. That means you still have to pay it all off in the end. Make sure your income is capable of doing that.
  • You do not have the time to complete the lengthy payment period. Another reason to skip debt consolidation is when you cannot afford to wait a long time to be completely debt free. There are options that will quickly get you out of debt and consolidating them is not always the quickest way to do so. If you are about to retire and you want to be debt free before you do so, then you may want to reconsider your debt solution. There are faster ways like debt settlement or bankruptcy that will not only get you out of debt a lot faster, both can also reduce your debts.

What are your options in credit consolidation?

In case you are set on consolidating your debts, you may want to learn about your options next. According to Wikipedia.org, debt consolidation involves taking a loan that will be used to pay off multiple debts. While this is the most common way to consolidate debt, it is not the only way to do so.

Here are other options for you to combine your debts into a more simple and easy payment plan.

  • Debt management. This debt solution begins with credit counseling wherein a credit counselor will help you analyze your debt situation. They will help you come up with a debt management plan that will also be presented to your respective creditors. This plan contains your proposal for a low monthly payment over a longer period. Your debt will not be combined under one loan but you will still make a single payment each month. The total payment will be sent to your counselor who will take charge of distributing it to your different creditors. While it is not guaranteed, the counselor will try to negotiate with your creditors for a lower interest rate on your debt.
  • HELOC. Short for Home Equity Line of Credit, this is when you borrow money against the equity of your home. You will use this amount to pay off your multiple debts and end up with only one monthly payment – on your mortgage.
  • Debt consolidation loan. This is the most popular way to consolidate debt. You get a personal loan that has a lower interest rate than your current average. There are financial institutions who can provide you with this type of loan to specifically pay off your multiple credit accounts. To get a low interest, you need to have a good credit score.

3 Ways That Debt Management Can Make You Rich

man carrying a credit cardDebt management can refer to two different things. One is the debt relief program that can help you achieve debt freedom. The other involves the habits that will help you manage your credit so you can keep yourself from being ruined by the credit that you have taken on.

Debt had always been given a bad image. It is viewed to be a source of misery for a lot of families. Being in debt is the epitome of a financial crisis. When you have too much credit obligations, you will end up with a very restricted budget. Since you have to pay off your debts, you will be left with a smaller amount for your basic necessities. In most cases, you are compelled to sacrifice a lot about your life in order to meet all the required debt contributions on a monthly basis.

Based on the credit card data from the NerdWallet.com site, the average household credit card debt is at $15,270. This is when you divide the total debt of $856.9 billion with indebted household alone. But we all know that most of us have more than credit cards to take care of. We also have mortgage loans and student debts to take care of. Not to mention the medical bills that usually drive people to declare themselves as bankrupt.

Without a doubt, debt management is something that we need. Whether it is the debt relief program or the skills to manage your debts, it remains to be a useful solution to your money woes. But did you know that it can also make you rich? Although we have just explained how too much credit can rob from you, it can also help you build your wealth.

How does credit management help you get debt freedom

Of course, before debt can propel you towards wealth, you have to learn how to get rid of debt first. It is the whole debt experience that will make you rich – at least, if you do it correctly.

Step one is to take control of your debts first. While there are many options to get out of debt, we will be focusing on debt management. All of the available debt solutions are effective but you need to be qualified for it. Not only that, they all have different processes and effects in your finances that you may want to consider how you want your financial situation to end up when you finally achieve debt freedom.

Debt management is a great alternative to debt consolidation loans. Instead of relying on a loan to pay off your debts, you will restructure your debt payment plan so you can afford the monthly payments without sacrificing too much of your basic necessities.

Here are the important facts of this debt solution that will get you out of your credit problems.

  • It involves a credit counselor who has the expertise to analyze your debt and financial situation. They will scrutinize how much you owe and what you are capable of paying on a monthly basis.

  • For maximum amount of $50 per month, they can help you create a debt management plan and assist you in implementing it.

  • A debt management plan contains your proposed monthly payment that is usually lower than what you used to contribute. This is done, not through debt reduction, but by stretching your remaining balance over a much longer payment period. This results in a lower payment scheme.

  • The credit counselor will also try to negotiate for a lower interest rate on their balance. This can help lower the monthly payments even further. Of course, this will never be guaranteed by the counselor because the final word will come from the creditor. But still, you should know that they will make their best effort.

  • The monthly payment in this debt solution will allow you to simplify your plan. Although the credit accounts will not be combined, your payments will be. Part of the service of the credit counselor is to help distribute the monthly payment that you will make. You do not have to put too much effort in tracking your due dates and making sure that your money arrives in time in your credit account.

If you follow your debt management plan, you will find yourself out of debt soon enough. But with all of these processes, how can this debt solution make you wealthy?

3 things you gain from this debt solution that will make you wealthy

The thing that will help you become rich is the attitude that you will gain when you implement the effective debt management tips that will be imparted by the credit counselor.

Here are the three important learnings that you will have through this debt relief program and how each of them will help you increase your personal net worth.

Financial Literacy

The first learning is financial literacy. People get into a financial crisis because they did not know how to manage their money wisely. They got themselves into debt because they failed to understand what it will cost them. According to the survey published by the National Foundation for Credit Counseling through the NFCC.org, 40% of Americans think that their financial knowledge only merits them a C, D or F (2013). This proves that financial literacy is one of the ways that we can avoid putting ourselves through a debt crisis. You cannot find financial success when you lack the knowledge to manage your money. This is something that debt management can help you with.

All debt management programs will begin with credit counseling. The counselor will educate you and give you the materials that you need to help you understand how money should be spent. You will be taught how to budget, save and how to make smart decisions about your finances. Your knowledge is what will propel you to explore opportunities that will grow your money.

Discipline with Money

Another learning that you will get from debt management is discipline with money. It is very important that you learn how to control your finances because that is where the discipline will be honed. The most important manifestation of that discipline will be shown in how you spend your money. If you are reckless in your spending and you cannot follow a plan, then you will have no hope of controlling where your money should go to. You will be bound by compulsive buying habits that will eventually lead you to be in debt.

Through the watchful eye of the credit counselor and the rules in your debt management plan, you will be trained on how to implement your financial plan. This discipline will also be forced into you because when you fail to follow the plan, your creditors will terminate it and you will go back to paying the bigger amount that you used to make.

A plan, whether it is a business plan or budget plan can only be effective if you learn how to implement it. By having the discipline, you can get the fruit of the goal that you are trying to reach through your financial plans.

No Shortcut for the Debt Solution

The last learning is knowing that there is no shortcut. In debt management, there is no reduction of what you owe. You will end up paying for everything that you have borrowed – up to the last cent. You are only restructuring your payment plan to make it easier.

This is an important lesson that we all have to learn. When we have it easy, we sometimes tend to take things for granted – especially the lessons that we should have learned from our mistakes. If you fail to realize the mistake and take in the lesson, you can get into another financial crisis. We have mentioned before that being in debt will keep you from achieving financial wealth. So the patience that you will get from this debt solution will help you develop the perseverance that will make you rich.

Debt Consolidation Programs – 3 Important Questions To Ask

unsecured loan and secured loanIf you are looking for a means to fix your multiple credit problems, one of the most effective ways to do that is through debt consolidation programs. It literally involves combining your different debt obligations so you can simplify your debt payment process.

There are many debt solutions that will allow you to consolidate everything that you owe so you end up with only one payment every month. Debt management, debt settlement and balance transfers can all give you this one monthly payment. However, none of them is as comprehensive as debt consolidation loans. Any type of debt can be combined through this option – mortgage and even student loans.

As the name suggests this type of debt relief program involves getting a loan that is significant enough in amount to pay off all the other debts that you owe. When you apply for this loan and you get an approval, you want to completely pay off the other debts so you are left with only one debt and one lender to pay every month. You can choose between secured or unsecured loans – depending on your qualifications.

But before you use debt consolidation programs as your debt relief option, you need to ask yourself three questions first.

When is debt consolidation loan a good idea?

Not all financial experts agree that debt consolidation programs that use loans to pay off debt is effective. That is because they think that getting a debt to pay for another debt is just like digging a hole to cover another one. However, there are studies that show how people are more emotionally inclined to erase debt accounts regardless if it causes them to pay more in the long run.

Scott Rick, a marketing professor from the Michigan Ross School of Business, and other professionals conducted experiments and surveys that will help identify how consumers behave when it comes to debt payments. In an article published on their website in 2011, the authors of the study revealed results that showed how consumers focus on lowering the number of debts that they owned. They do not necessarily concentrate on the total amount of debt that they will end up paying off. According to Rick, participants in the experiment would rather eliminate debt accounts even if there is heavy evidence that it will cost them more. The news release about this study is fully explained in the link: http://www.bus.umich.edu/NewsRoom/ArticleDisplay.asp?news_id=23284.

Truth be told, even the most clueless of all consumers will immediately assume that getting a big loan as a debt solution is effective. It seems like the emotional satisfaction of having only one debt to deal with is appealing to consumers. That is true even if it means having the same or a higher amount of debt.

Although it may seem like your emotions lean towards using debt consolidation programs, you still have to identify the signs that it is the right debt solution for you. There are specific hints that will determine if this solution will get you out of debt or not.

  • You mostly have high interest credit card debts. Since credit cards accumulate the fastest thanks to the interest rate and the finance charges, you can benefit from debt consolidation programs. It addresses the multiple accounts and the high interest immediately – since loans generally have a lower interest than these card accounts.

  • You have a stable and steady income. One of the requirements to get a loan approval is being able to show that you have the ability to pay back the loan. If you cannot prove that you have a stable and steady income every month, then you will have a hard time finding a lender that will approve your loan.

  • You can qualify for a low interest rate on the loan. To get a low interest rate on the loan that you are applying for, you need to convince the lender that you are a low risk borrower. That means, the chances of you defaulting on your loan will be low. They do not have to protect themselves by issuing a high interest rate. There are two ways to do this. If you have a good credit score, you can get any unsecured loan. If you do not have a good credit score, having a collateral that will guarantee the loan will suffice.

Ideally, you have to possess all of these signs before you use this debt relief option to solve your debt problems. But if not, you may just have to say no to debt consolidation loans.

What are the pitfalls of consolidating debts through a loan?

The second question that you need to seriously consider when using debt consolidation programs are the pitfalls that can make it fail. Even if all the signs point you towards using it as a debt solution, you may want to ensure that you can implement this program properly so debt freedom is assured.

Here are some of the common pitfalls to using debt consolidation loans.

  • Feeling like you have paid off your debt. Remember that you just shifted your credit accounts and combined it under one lender. You may have closed off the accounts but the debt that you owe remains the same.

  • False sense of complacency. Be careful of the convenience that you feel because of the one payment that makes your debt payments easier. It might prompt you to be relaxed and less vigilant when it comes to monitoring your expenses. This should not happen. You still need to control how you spend your money and to make sure that your budget is followed strictly.

  • Giving in to the temptation to use your credit cards again. Since your credit cards are now completely paid off, you have to battle the temptation to use it once more. You do not want to grow your debt if you still haven’t paid what you currently owe.

  • Relying on getting another loan to pay off any accumulated debt. Some people, if they give in to the last pitfall, think that they can easily get out by relying on debt consolidation programs once more. This debt solution is best to be used only once. After that, you need to be more careful about how you will manage your money.

Knowing these pitfalls will allow you to ensure that debt consolidation loan is effective in getting you debt freedom. Remember that it takes constant hard work and discipline to complete this program.

Where to get a loan to consolidate your debts?

The last question that you will encounter is where do you usually get the loan to finance debt consolidation programs? You have so many options before you but it is important to know which lender will suit your financial capabilities. Here are some of your choices.

  • Banks. Obviously, banks are the primary sources of loans. However, it is best to get a loan from a bank that you do not have an account with. Some banks will offer you a good rate just to get you as a client. But do not hesitate to get a quotation from your own bank too. That way, you can compare them.

  • Credit unions. Another option for consumers are credit unions. These act like banks but you have to be a member before you can have an account with them. This is a great alternative to banks especially when you have a less than favorable credit score and could end up with a high interest on your loan.

  • Peer to peer lending sites. This is not as old as the two other options but it is gaining popularity in recent years. Instead of being lent money by the company behind website, the lenders are people from the community themselves. This is usually done online so the overhead costs are not too big. That helps influence the low interest rate. Sample peer to peer lending sites are LendingClub.com or Prosper.com.

There are other sources of loans but make sure that you only get from trusted companies. You may end up being scammed out of your money if you are not careful.

Despite the effectiveness of debt consolidation programs, make sure that you learn how to manage your money and debt to keep out of another financial crisis. The debt solution will help pay off your debts but staying out of it is another lesson altogether.

4 Pitfalls Of Debt Consolidation Loans

When you are considering consolidating your multiple debts, one of the first options that come to mind is to use a loan. Although debt consolidation could also mean debt management or balance transfer, it is defined by Investopedia.com as “the act of combining several loans or liabilities into one loan.” That refers mainly to debt consolidation loans.

That simply means you, as the debtor, will take out a master loan that is enough to cover your multiple credit obligations. The goal is one of two things: a simple payment plan or a lower monthly contribution cause by either a lower interest rate or a longer payment period.

In most cases, people who have no idea what debt relief is all about immediately consider this process as a viable solution. It seems like the logical way to put some order into a seemingly difficult debt situation.

4 risks of using a loan to consolidate debt

burning house of cashBut while debt consolidation is a great option to get out of debt but there are a couple of pitfalls that you need to think about. It is proven that debt consolidation loans can fix your multiple problems with debt but you have to take note of these 4 risks.

  1. False sense that you have solved the credit situation. When you get your loan, your next task is to pay for your multiple debt obligations. After all, that is how you consolidate your debt. However, some people get the false sense that they already paid off their debts. When you think about it, you only shifted your debts around. The money that you used to pay for the multiple credit account is still debt. You have to pay that back. Unless you have to paid for the debt, you should not feel that you have already solved your credit problem.

  2. Opting for a high interest rate loan. When you use debt consolidation loans, you have to target a low interest rate. If you cannot do this, you will end up paying more in the long run – as compared to getting a lower rate. It defeats the purpose of using this type of debt solution as it will not make your situation better. It could simplify your debt payment but it will not really save you any money.

  3. Endangering your personal assets. For people who do not have a good credit score to qualify for a low interest rate, they opt to put their personal assets on the line to get a secured loan. While this will guarantee the low rate, it will endanger their homes, cars or other valuable assets. If they cannot pay off the loan, the lender could get these collateral as alternative payments.

  4. Temptation to get more credit. Most of the time, the multiple accounts that you are paying off immediately are credit card accounts. Once you have paid this off with the loan, the temptation to use them again will be very high. You should not give in to this urge because you still owe the same amount of debt. It is just consolidated under one lender.

If you really want to use debt consolidation loans as your means to get out of debt, you have to be very careful of these pitfalls. When you know the risks, you can plan your debt solution to try to avoid them.

How to avoid the pitfalls of credit consolidation loans

Now that you know what you should avoid, you can construct your plans so that you can make this debt solution effective. Here are three things that you can do to guarantee success.

  • Create a debt payment plan. The pitfall that this will address is the first and the last. You want to make sure that you have a plan for the payment of the master loan. This plan will keep you from forgetting that your debt is still technically, not paid. This plan can also help you gain direction on your quest for debt freedom.

  • Check your loan options. It is very important to choose the type of loan that you will get. For instance, you have unsecured or secured loans. You also have peer to peer lending or family loans as your option. These all have their pros and cons and you can make a smart choice about your debt solution if you know your options.

  • Know if you qualify. If you do not have a good credit score or a collateral to make your loan interest rate low, you need to reconsider if this is the right debt solution for you. There are other options like debt management that will not require you to have a good credit score or a collateral. But you can still benefit from the single payment scheme and lower monthly contribution of debt consolidation.

Like all debt solutions, debt consolidation loans can only be effective if you know how to treat it properly. You want to make sure that you understand the processes and rules so you can maximize the benefits that will help you gain faster debt freedom. Not only that, you want to be able to know the tools that will make the journey bearable. Go on a road to self education. You need to start learning how to manage your money properly. That is how you can really move past your debt crisis.

9 Tips for A Debt Consolidating Loan

How To Make Debt Consolidation Loan EffectiveAssuming you haven’t been living in a cave for the past five years, you’ve undoubtedly seen or heard those ads for debt consolidation that will “cut your payments by 50%,” or “help you get out of debt fast.” And yes, consolidating all of your high interest loans and credit card debts into a single loan that has a lower interest rate and better payments does make good sense. However, it’s important to understand that it doesn’t always end up that way. There are numerous people who have done a consolidation loan but ended up paying a lot more than they would have otherwise. Plus, in the case of a home equity loan, there are a surprising number of borrowers who have ended up losing their homes. You could profit from debt consolidation but you do need to proceed with caution. Here are some tips that could help you do just that.

1. Order your credit reports and FICA score

Any loan that you are able to get will be based mostly on your credit score so you need to know what it is. If you find that you have a fairly good score and a reasonable credit rating, you will be able to consolidate your loans at a better rate.

2. Check out your other options

Before you sign up for a debt consolidation loan, it pays to check out your other options. If you’re not in terrible trouble and just want to save money, your best answer might be to simply pay off your debts as quickly as you can by prioritizing them. Review your loans to see which one has the highest interest rate. Do everything you can to pay it off first while still making the minimum monthly payments on your other debts. You could also contact your credit card companies and possibly negotiate lower interest rates. Finally, consumer credit counseling has helped many families with free or low-cost counseling on how to manage debt and prepare a budget.

3. Know the differences between a consolidation loan, debt negotiation and a debt management plan

There are companies online that claim they can lower your payments and get you out of debt fast with consolidation loans. However, they might be using methods such as debt settlement, debt management or even bankruptcy. So, it’s important to understand the differences between these. As you might guess, a debt consolidation loan is one where you borrow money and pay off your other loans. You could also reduce your payments through a debt management program but this works differently. This is where a credit counseling agency or debt management company serves as the middleman between you and your lenders and attempts to negotiate reductions in your interest rates or fees on your loans. Each month, you then pay the credit counseling agency or debt management company. It then distributes the money to your creditors. Finally, debt negotiation is where you settle a debt for less than what’s owed. In this instance, you pay a part of your balance to your creditor and it writes off the rest of your debt.

If you’d like additional information on the options available to a debt consolidation loan, watch this video.

4. Try to pay off your debt as quickly as you can

While a debt consolidation loan should be able to get you a lower monthly payment, this is because you’re spreading your repayment over a much longer amount of time. This means it’s likely that you’ll pay more in interest charges than you would have paid otherwise.

5. Get the right loan

It’s possible to get a secured loan, which is one that is backed by some asset as collateral or an unsecured loan that is also often called a personal loan. Secured loans are usually secured lines of credit, home equity loans or second mortgages. They generally have lower interest rates than an unsecured loan because they are less risky for the lender. If you were to default, it could recoup its money by selling the asset. Plus, it’s possible that a home equity loan would be tax deductible. But do carefully consider the risks before getting any type of secured loan. Also, check to make sure it doesn’t include some hidden fees such as “points.” A safer option is an unsecured loan because you’re not required to risk your house or any other asset. But to get a decent rate on an unsecured loan you would need to have pretty good credit.

6. Comparison shop

Don’t sign up for the first debt consolidation loan you’re offered. Get quotes from several different companies and then compare the interest rates and terms carefully. It’s possible that your own credit union or bank will be your best bet – especially for personal loans. Get all quotes in writing so that you can compare several different lenders side-by-side.

7. Read your contract carefullyWoman holding glasses and reviewing credit card statement

Before you sign a contract for a debt consolidatng loan make sure you read every word in the contract and then read it again. If you have questions ask them and make sure you understand the answers even if you have to ask several times. If you’re in doubt about anything hire a lawyer or get another independent source to take a look at the contract for you. There can be things that seem insignificant but end up costing you thousands of dollars or even your house. So practice due diligence

8. Don’t pay for credit insurance

There are lenders who will try to pressure you into buying credit insurance. They may even imply that if you don’t sign up for it your application will be rejected or worse yet, they may attempt to hide the cost from you. If a lender tries this, get out of there fast and file a complaint with the appropriate authorities in your state. Credit insurance can add a huge cost to your loan and it usually offers very little protection.m

9. Finalize the loan process

You need to do the complete application process, which should be straightforward but may take some time and work. If at the end of the process you find your loan rate is not that which you were quoted, ask why. And then check with your next best option. Don’t get taken in by what’s called the old “bait-and-switch.”

What To Do If You Can’t Qualify For A Debt Consolidation Loan

frustrated womanYou’re having a hard time with your debts and you’ve tried to get a debt consolidation loan. Unfortunately, you don’t have enough equity in your home to get either a home equity loan or home equity line of credit. You applied for an unsecured loan at your bank or credit union but were turned down. You’re receiving calls from a debt collector nearly every day and you’re at your wits’ end. So what can you do? Here are eight suggestions for what to do when you can’t get a conventional loan.

Look for a bad credit loan

There are companies that specialize in loaning money to people who have bad credit. You can find them by going online and searching on the term “bad credit loans.” In fact, there is even a website the www.badcreditloans.com as well as www.247lendinggroup.com. Other sites with loans for people with bad credit include Springleaf Financial and Avant Credit. Be forewarned that most of these sites won’t loan more than $5,000 and their loans usually come with very high interest rates.

Try for a peer-to-peer loan

Peer-to-peer lending is where you borrow money directly from a person or group of people with no third-party financial institution involved. The number one site for this type of lending is www.lendingclub.com, which offers unsecured (personal) loans up to $35,000. Another popular peer-to-peer lender is www.prosper.com. If you have poor credit, you may not be able to get a peer-to-peer loan but it would certainly be worth trying.

Get a payday loan

If you’re short only a few hundred dollars and have steady employment, you could get a payday loan. This is where you write a check to the lender for the amount you need, plus its fee and get cash in return. The payday lender will then cash the check on your next payday – hence the term payday loan. This means you will need to have enough money in your checking account to cover that check or your loan will be automatically rolled over and you will be charged another fee.

Tap friends or family members

This isn’t a very popular option because it’s difficult to go to a family member or friend and basically beg for money. However, it is definitely a way to get a loan when you have bad credit. If you go this route just make sure that you treat the loan just as if it was a bank loan. Write out a contract spelling out how you will repay the money and the interest rate you will pay – because you actually do need to pay interest on that money. The good part of this is that you certainly won’t have to pay as much interest as if you had a bad credit loan. And do make sure that you pay back the money as you had agreed to and on time.

Pawn something

Again if you only need $500 or less you might be able to pawn something. The advantages to this are that you get the money immediately and that you could get the asset back by paying off the “loan” – usually within 30 days.

Look for a second jobWhat You Can Learn From Successful People About Debt Freedom

Could you take on additional shifts where you now work? If not, you should be able to get a part-time job. The food service and hospitality industries are almost always looking for people who would be willing to work 15 or 20 hours a week. These types of jobs rarely pay much more than $8 or $10 an hour but if you use all the money you earn to pay off your debts you could be debt free in maybe two years or less.

Try to settle your debts

If you’re nearly six months behind in your payments, you could contact your lenders and attempt to settle your debts for less than you owe. To do this means contacting each of them individually and making a settlement offer for 40% or 50% of what you owe. In many cases you will be able to negotiate a favorable settlement because the lender would rather get “half a loaf” then see you declare bankruptcy where it would get nothing. You have to be a reasonably good negotiator to pull this off. Your lenders will want immediate payment so you also need to have the cash in hand to pay for your settlements.

Hire a professional debt settlement company

Most people choose to hire a debt settlement company instead of attempting to negotiate settlements themselves. There are two important reasons for this. First, a debt settlement company like National Debt Relief has skilled and experienced counselors that are almost always able to negotiate better settlements than you would be able to do yourself. And second, this removes the need to have the cash available to pay for your settlements. What would happen instead is that the debt settlement company would settle your debts and you would then have a monthly payment plan that should have you debt free in two to four years.

Start rebuilding your credit

Whichever of these options you choose, it’s important that you also start rebuilding your credit. One way to do this is by getting a debit card tied to your checking or savings account. If you use the card sensibly this will be reported to the three credit bureaus and will eventually have a positive effect on your credit score. If you elect to get one of these cards just make sure that how you use is reported to the credit bureaus.

You can do other things to improve your credit as revealed in this video.

Step By Step Guide To Debt Consolidation Loans

man holding moneyAre you looking for the best debt solution for your multiple credit obligations? You may want to consider consolidating your debts.

The purpose of doing this is to provide you with a more simple payment plan. Instead of tracking multiple debts, you will only end up with one debt to pay off. Among the other goals of this debt solution is to give you a lower monthly payment requirement. This will help free up some amount from your budget so you can use it on other things like growing your savings. This can be done by stretching your payments over a longer period. There is no debt reduction here. The longer plan will allow you a lower payment every month. It can also get you a lower interest rate – which can lower your payments even further.

If that is appealing, you can make sure that you choose the right program that you can use. There are many debt consolidation programs that can successfully get you out of debt. One of them is debt consolidation loans.

5 steps to consolidate debt through loans

The whole idea of debt consolidation loans is to borrow a master loan that is enough to pay for your other debts. That is how you consolidate the debt. You will completely pay them off so you only owe the lender that gave you the loan amount. That makes payments easier. If you use debt consolidation loan for your credit card debt, that will give you a lower interest rate for a balance that is stretched over a specified payment period. It will keep your interest fixed and the balance will not accumulate any finance charges.

So how do you go about debt consolidation loans?

  1. Know how much you owe. Find out how much you owe so you can get the amount that you need to loan. If you have a mortgage loan, car loan, credit card debt and even student loans, see which of these can be combined. It may not be possible to combine your student loans with the others but if you have more than one debt from college, you may be able to combine them. For the rest, you can usually get a loan to pay for all of them.

  2. Check your finances. When you know your debts, it is time to figure out how much you will be qualified to loan. This can be determined by figuring out how much you are earning every month. That way, you will know if you can combine all of your debts. If you cannot qualify for a big loan, you may have to choose the debts that you will prioritize. This is also a great time for you to check your expenses to see if you can cut back on some of them. That way, you can boost your ability to pay off your debts.

  3. Choose a loan. The next step is to choose which loan you will use to pay off your debts. Call you local bank and ask them about your options. If you are still paying off your mortgage, you may want to borrow against the equity of your home. Or if you only have credit card debts, a good credit score may qualify you to get a low interest personal loan. Compare debt consolidation loan rates for you options. When you have chosen, prepare the document and apply for it.

  4. Pay off your debts. When you have been approved of the loan, you must use that money to immediately pay off the debts that you owe. Do not use it on something else and only on the debt that you intended when before you borrowed the loan.

  5. Strictly pay off the loan. Once you have completely paid off the debt, you should strictly pay the debt as indicated in your payment terms. Do not be late and manage your budget so you will always have money to use for your payments.

Tips when combining your debts into one loan

When you are using debt consolidation loans, you have to follow certain rules to make sure that this will be effective in getting you out of debt. Here are some of the important tips that you have to follow.

  • Make sure you qualify for a low interest loan. Not only should you qualify for a loan, you must qualify for a low interest one. This can only be done if you have a collateral or a good credit score. To see if you have a good score, you can download a copy of your credit report from the AnnualCreditReport.com and use a free online credit score calculator.

  • Stay away from more debts. It could be tempting to use your paid off credit cards now that they have zero balance. Try to keep yourself from doing this by keeping your cards – or cutting them off completely.

  • Choose the right type of loan. It is also very important that you choose the right type of loan for your debt payments. Make sure that it is a low interest one that will not endanger your assets unnecessarily. If you have a good credit score, just get a personal loan. Try not to put your home on the line if you do not have to. Also, stay away from high interest loans like payday loans or credit card cash advance. These will only put you further in debt.

While you use debt consolidation loans for your specific financial situation, make sure that you learn your lesson. Make the right financial decisions this time so you will not fall into the same debt pit again.

The Dos and Don’ts of Debt Consolidation

woman drowning in debtIf you’re struggling under a mountain of debt, don’t be scared. You could get it under control and even become debt-free in a few years via debt consolidation. If you’re not familiar with debt consolidation it’s where you combine all of your debts together into one new payment. When done right, debt consolidation offers two big benefits. First, it means you would be making just one payment instead of the multiple ones you’re now making. And second, that one payment should be much less than the sum of the monthly payments you’ve been making. But before you rush into debt consolidation it’s important to know the dos and don’ts.

Do check into credit counseling

Before you do anything else you should check into consumer credit counseling. There is probably an agency or company near you that offers this service and your first visit should be free. What will happen is that you will sit down with a counselor who will spend at least an hour with you going over all of your finances. He or she will then help you develop a budget and a debt management plan (DMP). Depending on how much you owe, your DMP could have you debt free in anywhere from three to five years. Since this introductory session will probably cost you nothing, it’s a no lose situation. If you like the advice and the plan you’re given, you can continue on with the credit counseling. If not, you could just walk away and try something else.

Don’t be flimflammed

If you decide you would like to try consumer credit counseling, be very careful about the agency or company you choose. There are a number of scam artists out there who will offer to loan you the money to consolidate your debts, take your payments on the loan and then do nothing. The sad part is that it could be three or four months before you realize you’ve been scammed and by then it’s too late to do much. You will not only have lost the money you paid the crook but will now be even further in debt.

Do talk to your bank or credit union about a loan

One of the fastest ways to consolidate debts is by taking out a loan and paying them all off. As noted above this should yield a much lower monthly payment than the sum of the payments you’re now making. Paying off all of your creditors simultaneously would not only stop them from bothering you but would also get rid of any debt collectors who have are harassing you.

Don’t get a secured debt consolidation loan

Secured loans mean loans where you are required to offer up some asset as collateral. In most cases that asset will be your home in the form of a home equity loan or home equity line of credit. There are two problems with these types of loans. First, they put your house at risk. If you were to stop making payments on the loan, your lender could repossess your house and you could find yourself out on the street. Second, these loans usually have a term seven years or longer. In fact, a home equity loan could have a term of 10 to 15 years. In comparison, if you could get an unsecured loan this would not put your house at risk and you should be able to pay it off in five years or fewer.

Do try settling your debts

If you have some basic negotiating skills you could contact your lenders and offer to settle your debts for 50% or 60% less than you owe. If you are at least six months behind on your debt payments, you might find your creditors ready and willing to settle with you. While this is technically not a form of debt consolidation, it is a way to get debts under control and paid off.

Don’t try this unless you have cash available

In addition to being six months behind in your payments, you need to have the money available to pay your settlements. For example, if you were able to settle a $5000 debt for, say, $2500 you would need to have the $2500 in cash available to send to your lender. In fact, offering to pay off the debt with cash is one of the most important reasons why your lenders would be willing to settle with you.

Do hire a debt settlement companyman holding multiple credit cards

If you don’t have the necessary amount of cash available to settle your debts yourself or if you don’t believe you’d be a good negotiator, then hiring a debt settlement company could be a better option. The best debt settlement companies have debt counselors who are experienced at negotiating with most lenders including the credit card providers. This is a way to consolidate debts because once the company has settled all of them; you would be required to send it only one payment a month. Plus, you should be debt-free in just 36 to 48 months.

Don’t fall for big promises

In the event you decide to hire a debt settlement company, don’t fall for any big, pie-in-the-sky promises and refuse to pay any upfront fees. Honest debt settlement companies do not charge upfront fees. In fact, you would not be charged anything until the company settles all of your debts and presents you with a debt payment plan. In addition, no ethical debt settlement company will promise to loan you money to pay off your debts or that they can help you become debt free in just a few months. There are other red flags to watch out for when choosing a debt settlement company as explained in the following video.

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