Assuming 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.
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.”