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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.

Revealed –The 6 Biggest Myths About Debt Consolidation

man carrying debtHave you heard the story of the Greek king Sisyphus who was doomed to push a boulder up a hill every day only to see it roll back down so that he would have to start again the following day? If so, you may feel the same way about your debt – that there’s just no end in sight and you will never get it completely paid off. You have probably also heard about debt consolidation as a way to get your debts under control. While this is certainly a good alternative, it’s important you understand these six myths.

  1. There are companies with lower interest rates than others
  2. Credit counseling can get your monthly payments cut in half
  3. You can’t get out of debt without a formal program
  4. Some credit counseling agencies can negotiate lower DMP payments than others
  5. You will always save money through debt consolidation
  6. Bankruptcy is not a big deal

1. There are companies have lower interest rates than others

One way to consolidate debts is to get a loan and pay them off. You may have seen teaser ads for home equity loans with very low interest rates and feel this might be a good option. But the fact is you would need be on the A credit list to qualify for one of those very low rates. If you’re not on that A list, expect to pay the prime interest rate plus 4% or 5%, as well as a point or two in fees.

2. Credit counseling can get your monthly payments cut in half

What a good credit counselor can do is work with your creditors to get your interest rates reduced and any late payment penalty fees waived. This can mean a lower monthly payment than the sum of the monthly payments you’ve been making, but it won’t cut your payment by 50%. If a credit counselor tells you that he or she can get your payments cut in half, this is just a numbers fudging deal. As an example of this, if you missed two $200 payments on a $10,000 balance, your third month’s bill will be the $600 that you owe. If your counselor re-ages that bill and knocks your payment back to $200, the missing money will just be tacked back onto your total owed.

3. You can’t get out of debt without a formal program

The real truth here is that you can basically create your own debt management program. Almost all creditors, including the credit card companies, have special reduced-interest programs if you just contact them. Of course, you’ll have to make all those phone calls yourself and will need to know what to say. You will also have to be very persistent because you probably won’t get through to the company’s hardship program department on the first or even second call. And when you do get through you need to be polite, take full responsibility for your problems and be ready to request something specific such as a reduction in your interest rate.

4. Some credit counseling agencies can negotiate lower DMP payments than others

When you go to a consumer credit counseling agency, your counselor will help you create a DMP or debt management plan. He or she will contact your lenders and present your DMP for their approval. If all of them accept your plan, you will no longer be required to pay them. Instead, you will pay the credit-counseling agency each month and it will distribute the money to your creditors. However, it’s a myth that some credit counseling agencies can get you a lower DMP payment than others. The truth is that most lenders automatically move 95% of those individuals who are enrolled in a DMP into their own existing programs. This means that regardless of which credit counseling agency or company you choose, the odds are that you will get approximately the same program.

5. You will always save money with debt consolidation

If you choose to get a debt consolidation loan and you’re told this will save you money, get out your calculator and do the numbers. As an example of this, let’s assume that the lender tells you that he can get you financing with no out-of-pocket costs. In this case, make sure it’s not just rolling its fees into your loan where you would then have to pay interest on them. What you need to do is compare the total of your existing monthly payments to what your payments would be for that same amount of debt under your debt consolidation loan, including fees and any voluntary contributions. If you find that you’re not saving at least 5% to 10%, then a debt consolidation loan wouldn’t be a good choice.

It would also be a bad choice – according to this video with Suze Orman – to use a HELOC or home equity line of credit to pay off credit card debt.

6. Bankruptcy is not a big issuepetition to file for bankruptcy

Many young people are led to believe that a better answer than trying to pay off, say $7000 in debt is to declare bankruptcy. This can be very appealing because it’s possible to get an attorney to do a bankruptcy for as little as $500 – to discharge $7000 in debt. While this might sound very attractive, the damage that will be done to your credit will still be there long after you could have paid off that $7000 normally. The fact is, bankruptcy is a very severe solution and should be used only in circumstances such as cumulative debt of $50,000 on a $20,000 annual salary. The truth is that a bankruptcy will stay on your credit report for nearly 10 years. Plus, prospective employers look at credit reports and might refuse to hire you based on what they find in yours.

Can You Really Trust A Debt Settlement Company?

question markIf you’ve searched the Internet on the terms “debt settlement” or “debt relief,” you undoubtedly got page after page of results – or companies that claim they could settle your debts for thousands of dollars less than you really owe. Since this comes under the category of “if it seems too good to be true,” this raises the question of can you really trust those companies.

How debt settlement works

If you’re not familiar with debt settlement, here’s how it works. First, you need to be nearly six months behind in payments to your creditors. When this is the case, the debt settlement company then has leverage to settle your debts for less than you owe. This is because lenders typically sell off debts they have been unable to collect after 180 days and they usually sell them for only pennies on the dollar. So when a debt settlement company contacts a lender and offers to immediately pay off the debt for, say, 40% or 50% of what’s owed, most lenders will agree as this represents a much better deal than selling off your debts to a collection agency.

You will be presented with a payment plan

When the debt settlement company is able to settle all of your debts, it will present you with a payment plan. Depending on how much you were in debt, it could require two, three or four years before you became debt free. If you sign off on the plan, you will then pay the debt settlement company and not your creditors. Your debts will have been consolidated and you would have only one payment a month to remember.

The benefits of debt settlement

Of course, the major benefit of debt settlement is what you’ve already read – that you should see your debts slashed by 40% or 50%. But there are benefits in addition to this. For one thing, when you contract with a debt settlement company you will no longer be harassed by any of your creditors because you will not be required to deal with them directly. Second, you will get your debts paid off in less time. Third, you should be able to choose which accounts you want to have closed and which you want to stay open. And fourth, you avoid the stigma of having to file for bankruptcy, which would mark you as a bad money manager.

The disadvantages of debt settlement

While debt settlement will not leave a stain on your credit reports as much as would a bankruptcy, it will effect your credit score. As we reported in an earlier paragraph, you have to be nearly six months in arrears on payments to your creditors for debt settlement to be a viable option. And any time you miss six months of payments, this is bound to have a negative effect on your credit score. Many experts believe that this would cost you about 80 points versus a bankruptcy, which could drop your credit score by as many as 200 points.

The scam artists

If you are so seriously in debt that you’re actually thinking about filing for bankruptcy, debt settlement could be an excellent option. But it’s important to choose a company you can trust. Unfortunately, some debt settlement companies are scams. They will ask for money up front, promise to settle your debts for pennies on the dollar and then never pay any of your creditors. It could be two, three or even more months before you discover you’ve been scammed and by then it’s too late to get any of your money back. Plus, you will probably have piled up a lot of new debt in the form of interest charges and fees during those months you thought the debt settlement company was paying your creditors – and they weren’t.

Here’s a video with more information about these scam artists and how to avoid them.

 

Who can you trust?

There are honest and ethical debt settlement companies. They are the ones who don’t charge any upfront fees and cost you nothing until you approve your payment plan. You can also trust a debt settlement company if it’s been in business for five or 10 years. The con artists generally open up under one name, scam as many people as they can, close down and then open up a few months later under a new name. Legitimate debt settlement companies are accredited by the Better Business Bureau and belong to organizations such as the US Chamber of Commerce and the Association of Fair Credit Counselors. These companies will also have a lot more positive online reviews than negative ones. In comparison, the scam artists usually have nothing but negative reviews.

Helpful debt counselorsYoung Man talking on the phone and smiling

An honest debt settlement company will have helpful debt counselors who will discuss your situation at length and offer valuable advice. The advisor you’re assigned will be friendly and knowledgeable and able to answer all of your questions. He or she will not pressure you to do anything.

Everything in writing

Another mark of an honest and ethical debt settlement company is that it will provide all of its information to you in writing. In comparison, a scam company generally won’t. It will rely on a lot of fast talk and verbal promises – that it will never keep.

A legitimate debt settlement company will provide you with a written contract to review and sign that will spell out the exact details of what the company will do and what you will be required to do. Naturally, you should very carefully review any contract you’re offered. If there’s anything about it you don’t understand, either ask a friend for help or pay an attorney to review it. Once you sign a contract with a debt settlement company you will be obligated to follow its provisions so it’s critical that you understand them.

How To Consolidate Debt On Your Own

stack of paid billsDebt can ruin your life in so many ways. For those of you who want to live a happy life, debt is definitely not a part of it. Debt relief is the secret to happiness and you may want to find the right program that will give you the debt freedom and eventually, the dream life that you have always wanted to live.

Fortunately, there are many options for you to get out of debt. There are various methods but most of them involves restructuring your debt payments so it becomes easier to commit to. Sometimes, people can afford to pay off their dues. It is just that the multiple accounts make it difficult to keep up with everything. This is when consolidating debt becomes a great option for debt relief.

There are two options to consolidate debt. One is with the help of a professional and the other is by using your own time and effort to handle the whole process.

Options for DIY debt consolidation

Some people refuse to get the help of a debt professional for the simple reason that they do not want to pay the service fee. They think that the money is better off sent towards their debt payments. While there are non-profit agencies that can help with debt consolidation, you have to understand that the dedication that for profit companies can give you is still different.

But if you really cannot afford the fees that debt relief companies will ask of you, there are options to consolidate debt by yourself.

Debt consolidation loan

You don’t need a professional to apply for a loan. Just follow the process of getting a loan and prepare all the documents yourself. The typical requirements include your proof of income and similar documents that will prove that you have the ability to pay back your debt. When you are approved of that loan, you can use that amount to pay off your multiple debts. That will leave you owing only one lender. Of course, you haven’t really paid off your debts yet. You still owe the same amount of money – you just shifted it so you don’t have to spend too much effort in monitoring your debts. It helps lower the chances of you missing out on a payment.

Balance transfer

Another way to consolidate debt without a debt professional is through balance transfer. The whole idea is to apply for a new credit card that offers zero interest for balance transfers. This is a popular promotion by credit card companies to entice consumers to let go of their old accounts and use theirs instead. These balance transfer cards will require you to pay a 3% fee that is based on the amount that you will shift to the new card. When you have transferred your credit card balance to this new card, you will enjoy no interest for the next 6 to 18 months – depending on the specific promo of the new card. Any payment made during this time will only go to your principal balance. That will help you pay down your debts faster.

Debt settlement

The last option to consolidate debt on your own is debt settlement. This is something that you can do with or without a debt expert. To do your own debt settlement, you need to convince your creditors that you are in a financial crisis. You will default on your payments intentionally to prove that you cannot afford to pay your dues like you did before. You should have a significant amount of money to offer your creditors – it can be a lower amount than your balance. If you do not have this, you need to save up for it. You will use this amount to negotiate with your creditors. You will tell them that you can immediately pay a certain amount but only if the rest of the debt will be forgiven.

All of these options will help you restructure your debts but you have to know that it can be quite difficult especially in you do not approach it with the right attitude. Debt relief can be hard if you do not have the discipline to follow through with your plans.

Signs you need a debt professional to consolidate credit

Hiring a debt professional or working on your own debt relief each have pros and cons. It is important that you clearly define if you can implement your chosen debt solution – otherwise, you will just waste your time, money and effort.

Here are some signs that will tell you if you should hire a debt professional or not.

  • You cannot handle the pressure. Negotiating with creditors is no mean feat. While it does not take a rocket scientist to accomplish it, there are some people who cannot handle the pressure. When the creditor refuses to cooperate, that can be very frustrating.

  • You are easily intimidated. Some people are not confident enough to face their creditor. This probably stems from the fact that they know their debts are their own responsibilities and that they are at fault. This will make them prone to intimidation. And when it comes to intimidation, creditors can be very aggressive just so they can get you to pay your dues.

  • You do not know what to do. If you have no idea how to go about the process, you should hire a professional to help keep you from making mistakes.

  • You have no time to work on your debts.Some people have all the confidence to face their creditors but they just do not have the time to do so. This is when a debt professional becomes necessary. You can work on growing your income while being assured that your debt payments are being managed well.

If you want to hire a debt relief company, you have to make sure that they only employ certified professionals. Certifications from the IAPDA or International Association of Professional Debt Arbitrators is a good place to start. Also, the company itself should be a member of reputable organizations like the American Fair Credit Council or AFCC.

The 7 Biggest Myths Of Debt Consolidation

frustrated woman with glassesIf you’re struggling under a huge load of debt you’ve probably heard the term “debt consolidation.” You may even understand what it means – consolidating or combining a number of different debts into one new program or loan. And don’t get us wrong. Debt consolidation can be an excellent way to get debts under control and even paid off. But there are some big myths related to debt consolidation that it’s important you know. They are.

  • Credit counselors can reduce your monthly payments by 50%
  • Some agencies can negotiate lower debt management plan payments than others
  • Credit counseling and debt management plans are all identical
  • Debt settlement is the cheapest way to achieve debt consolidation
  • If you want to get out of debt you need a formal program
  • A debt consolidation loan will always save you money
  • Your life would be ruined by a bankruptcy

Credit counselors can reduce your monthly payments by 50%

If a credit counselor tells you that he or she can get your debt cut in half, don’t believe it. As an example of this, suppose that you have missed two $200 payments so that the third payment due was for $600. A counselor with a debt management agency might be able to re-age that bill to get your payment back down to $200 but that missing $400 would simply be added back into the total amount you owe and you would end up paying interest on it..

Some agencies can negotiate lower debt management plan payments than others

Credit counseling agencies cannot negotiate lower payments because credit counseling does not involve negotiations. In the event a credit counselor tells you that he or she can negotiate on your behalf, it is really a debt settlement company. Debt settlement can be an effective way to get debts paid off but it is not the same as credit counseling. Here’s a short video with more information about the differences between these two options..

Credit counseling and debt management plans – they’re both the same

This is another myth. Credit counseling is where you have a counselor who reviews your finances and helps you develop a budget and the discipline required to make steady payments each month until your debt has been cleared. In comparison, a debt management plan is just one tool in a credit counselor’s toolbox. What a debt management plan amounts to is that your counselor will attempt to negotiate interest rate reductions with your creditors to help you become debt free quicker. You will send the credit counseling agency one payment a month and it will distribute the money to your creditors until your debts reach a zero balance. Unfortunately, statistics show that only 35% of those who enroll in a debt management plan ever actually complete it.

Debt settlement is the cheapest way to achieve debt consolidation

Debt settlement does have its pluses. In fact, it’s the only way to get debts actually reduced versus just moving them to a new lender or into a debt management plan. However, it may not be the cheapest way to handle debt consolidation, depending on the debt settlement firm you choose. Some of the shadier debt settlement companies charge big fees upfront before they do anything for you. Also, debt settlement will have a negative effect on your credit score and a harsher one then a debt consolidation loan or debt settlement plan.

If you want to get out of debt you need a formal program

Nothing could be further from the truth than the idea that you need a formal program to get out of debt. You could sit down and actually develop a budget and create your own debt management plan. Many of the people who drop out of a formal debt management plan did so because they found they could handle the program themselves. You could do debt settlement yourself by contacting your creditors directly and negotiating with them to get your debts reduced.

A debt consolidation loan will always save you moneysave money sign

The fact is a debt consolidation loan may actually cost you more money. Here’s an example of what we mean. If a lender was to tell you that it could get you financed with no out-of-pocket costs, what it probably means is that it’s simply rolling those costs into the loan, where you will end up paying interest on them. Plus, if you get out a calculator and do the math you’ll see that most debt consolidation loans will cost you a lot more over the long run vs. simply paying off the debts yourself. This is because they typically have much longer terms.

Your life would be ruined by a bankruptcy

If a credit counselor suggests that your life would be ruined by a bankruptcy, you should probably avoid that person. Yes, bankruptcy will definitely have a negative effect on your credit score and credit report. In fact, most financial experts believe that a bankruptcy would reduce your credit score by 200 points. This could drop you from having a “good” credit score to a “poor” or even “bad” credit score. In turn, this would make it very difficult for you to get any new credit for at least two to three years. However, you may be able to get some credit though it will come with a fairly high interest rate. If you work on repairing your credit, you could be almost back to normal in three to four years.

It’s also a fact that a bankruptcy will stay in your credit report for either seven or 10 years, depending on the credit-reporting bureau. But this is a case where having the stain of a bankruptcy in your credit report could be better than going without food or becoming homeless.