If you’ve ever heard these words you know you’re talking with a debt collector, which means you’re in trouble over at least one of your debts. That debt collector will do and say just about anything to get you to pay. If you’re really in trouble, you may be hearing from several collectors. What these people try to do is harass and manipulate you into paying your debt. Thanks to the Fair Debt Collection Practices Act, you do have rights and you can stop those annoying phone calls. But there is another solution that’s been used by thousands of families. It’s to get a debt consolidation loan and pay off all those debts.
A debt consolidation loan
If you don’t know what a debt consolidation loan is, it’s simply any loan you where you use its proceeds to pay off all or most all of your creditors. There are some good reasons to get one of these loans and some good reasons not to.
First, why to get a debt consolidation loan
If you are able to get a debt consolidation loan, you will …
- Get all those creditors and debt collectors off your back
- Have a lower monthly payment than the sum of the monthly payments you’re currently making
- Get a better interest rate than the average of your current interest rates
- Enjoy relief from the stress you’ve been experiencing as you try to deal with your debts
- Be able to sleep better at night
- Do better at work because you’ll be able to concentrate more on your job
Why not to get a debt consolidation loan
Unfortunately, there are some equally valid reasons to not get a debt consolidation loan. The most important of these are …
- You won’t have reduced your debts. You ‘ll have just moved them from one set of creditors to a new one
- You will pay more interest over the life of the loan than if you had just paid off your debts the normal way
- It will take much longer to pay off a debt consolidation loan than to pay off your current debts
- You should not take on any new revolving debt (like credit card debts) until you’ve paid off your consolidation loan
- You may have to get a secured loan, which would likely mean putting your home at risk for foreclosure
- You might not be able to handle the payments on the new loan
Do the math
Should you get a consolidation loan to pay off your debts? That’s a decision that only you can make. It might make good sense but before you rush off to your credit union or bank, do the math. First, add up the interest rates you’re paying on your debts and divide this by the number of your debts. For example, if you have one debt at 16%, one at 18%, two at 19% and one at 20%, your average interest rate average would be 18.40%. Next, add up your monthly minimum payments.
Go to your bank or credit union
Now, go to your bank or credit union and ask about a loan. If you need $10,000 or more, you may need to apply for a secured loan in the form of a refi, second mortgage or homeowner’s equity line of credit. If you owe less than $10,000 you may be able to get an unsecured or signature loan. Whichever turns out to be the case, make sure you learn the terms of the loan or how much interest you would have to pay, how long the loan would be for and if you will be required to pay closing fees or any other fees.
How much interest will you pay over the life of the loan?
The final thing to calculate is how much interest you will pay over the life of the loan. The odds are that you’ll be able to get an interest rate as low as 5% or even better, which will seem very attractive and certainly much better than your current average interest rate. But time does equal money. Let’s assume you’ll be borrowing $18,000, the term of the loan is seven years at 5% interest. If this is the case, your monthly payment would be $271.67 and you would end up paying $4820.13 in interest.
If you do the math and decide that a consolidation loan isn’t for you or if you learn you can’t get one, there are some other ways to get those debts under control.
- Get consumer credit counseling
- Do a balance transfer – transfer you high-interest debts onto a credit card with a lower interest rate or better yet, a 0% interest rate
- Snowball your debts – list your debts in order from the one with the lowest balance up to the one with the highest. Pay off the one with the lowest balance first as this will be the easiest one to pay off, then use the money you’ve freed up to begin paying down the debt with the second lowest balance and so on
- Declare bankruptcy
- Negotiate settlements with your creditors – if you’re six months or more behind in your payments, you may be able to negotiate settlements for pennies on the dollar. Not familiar with DIY debt settlement? Here’s a video that explains it.