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What You Need to Know About Credit Counseling and Debt Consolidation

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man balancing a checkbookDo you feel overwhelmed by your debts? if so, there is a way to get back on track.

It’ would be to use a consumer credit counseling agency to consolidate your debts.

However, if debt consolidation is done poorly or if you choose the wrong credit counseling agency, you could end up in an even worse situation.

Here are eight things you need to know about using a credit counseling agency to make sure you avoid creating more problems.

1. All credit counseling agencies are not the same

Just like there can be big differences between different laptop computers, there can the big differences between credit counseling agencies. You need to be very careful in choosing which one to work with. Your best choice would be a non–profit agency that belongs to either the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).

The reason why it’s best to choose an agency that belongs to one of these organizations is because they require their members to adhere to strict standards as set forth by the Council on Accreditation or some other approved third-party. This also means that their counselors must have passed a very comprehensive certification program.

Even if the agency you’re thinking of working with is a member of one of these two organizations it still pays to be careful. The one you choose should be organized, send statements and payments on time and offer helpful consumer education materials in addition to debt consolidation.

Here’s a video that could help you make sure you choose a reputable credit counseling agency.

2. How credit counseling will consolidate your debts

Using a credit counseling agency is basically using a third-party payment system. These agencies do not make loans nor do they provide debt settlement. However, they will negotiate with your lenders to get your interest rates reduced and any fees waived. And you may be offered what’s called a debt management plan (DMP).

If you accept a DMP this will effectively consolidate your debts because you will no longer be required to pay your lenders. Instead, you will send the credit counseling agency one payment a month until all of your debts have been paid off.

3. You may not need a DMP

The debt counselor at your consumer credit counseling agency should first review your finances to see if there might be a better alternative than a DMP. For example, if you have money left over after you’ve subtracted your expenses from your income then your counselor might help you develop a budget that would allow you to become debt free without a DMP, which could take as many as five years to complete. In fact, if your counselor does not discuss alternatives or if he or she does not seem to be compassionate and knowledgeable then you might want to request a different counselor.

4. This form of debt consolidation is both efficient and simple

If you do have a DMP your payment remains constant. You won’t need to worry what the sum of your payments will be each month. It will be the same amount until all of the lenders in your plan have been repaid. When one lender has been repaid the remaining ones will receive a bigger portion of your payment and this will help speed up the repayment process. In addition, your lenders won’t be calling you to demand payments as this typically stops once they understand that you have a debt management plan.

5. You will lose your credit cardsman holding multiple credit cards

One of the most important things to understand is that all of the lenders in your plan will close your accounts. This means you may need to learn to live without credit cards until you complete your DMP. In addition, you will not be allowed to open any new accounts. When you stop to think about it this just makes sense. If you’re continuing to charge while you’re in the process of repaying your debts, you would basically be spinning your wheels. You may be allowed to keep one card to emergencies but it probably will have a very low balance.

6. You’ll still have some work to do

You will still be receiving account statements from the lenders that are in your plan. It’s important that you send them to your agency. The reports you get from your credit counseling agency won’t reflect the interest that you’re still being charged. This means if you don’t submit your statements, the reports your agency gets will be seriously different from what you see in your bank statements. Some people – who didn’t carefully monitor their account statements – had a rude awakening when they thought they had completely paid off their debts only to find they still owed thousands of dollars.

7. Credit counseling isn’t right for everyone

The sad fact is that consumer credit counseling might not be for you.

For one thing, the majority of your debts must be unsecured debts such as personal loans, credit cards, department store cards, payday loans and personal lines of credit. If the bulk of your debt are either secured debts (think auto loan and home mortgage) or debts such as unpaid child support, spousal support, alimony, back taxes or student loan debt then a DMP can’t help you. In addition, it’s important that you feel confident that you can make your payments not for just a few mears.

8. A DMP is better than filing for bankruptcy

When you choose debt consolidation through a DMP it tells lenders that you’re paying 100% of your debts, which is a good deal different from discharging them in a bankruptcy. However, your credit reports may take a hit if your monthly payments are less than what you would have normally paid. Finally, this form of debt consolidation is not factored into your credit score but some lenders may add notations that you’re paying a third party. Unfortunately, this can be a bit of a red flag to prospective lenders or anyone else who is reviewing your reports. For that matter, some lenders won’t make new loans until you complete your plan.

Commonly Asked Questions About Credit Counseling

Q. What does credit counseling cost?

A. It costs very little to have your debts consolidated through a consumer credit counseling agency. For example, most of the non-profits charge a one-time, set-up fee of maybe $35 and then a monthly maintenance fee of $10. When you stop to think how much the credit counseling agency is doing for you, these charges are practically insignificant. In comparison, if you were to use a debt settlement company to consolidate your debts you could be charged anywhere from 15% to 25% – depending on the total of the debts being settled.

Q. What are credit counseling services?

A. One popular alternative to a credit counseling agency is to use a credit card for debt consolidation. Of course, this can be helpful only if the majority of your debt is credit card debt. But when this is the case you might be able to transfer your high-interest credit card debts to a new card with a lower interest rate. What is even better is to transfer all of your credit card debts to a 0% interest balance transfer card.

Q. Is debt consolidation though credit counseling a loan?

A. As noted in this article, debt consolidation through a consumer credit counseling agency is not a loan. It’s using a third-party to pay off your debts. However, a third way to achieve debt consolidation is to get a debt consolidation loan. Depending on your situation you might be able to get either an unsecured personal loan or a secured loan such as a home equity loan or a home equity line of credit (HELOC). Interest rates are currently at almost all-time lows. For example, it’s possible to get a personal loan within APR as low as 5.99%.

Q. Is debt consolidation through credit counseling a good idea?

A. If you’re struggling under a big load of debt then debt consolidation should be a good idea. However, it’s important to choose the right type of debt consolidation. Using a credit card balance transfer or getting a debt consolidation loan may end up costing you more even though you have a lower interest rate. The reason for this is that it will likely take you longer to repay the debt. On the other hand, using a consumer credit counseling agency will cost you practically nothing but it could take you as many as five years to complete your plan,

Q. Can you do credit counseling with a poor credit score?

A. Again, this depends on the type of debt consolidation you choose. As an example of this you could have a credit score down in the 400s and could still consolidate your debts through consumer credit counseling. But that low credit score could keep you from getting a personal loan with a decent interest rate or any loan at all. You might be able to get a HELOC or home equity loan even with a poor credit score as you would be using your home to secure it. A balance transfer will probably be out of the question.

Q. Could I do debt consolidation with my student loans?

A. If you’re having a hard time repaying your student loans, then debt consolidation could be a very good option. If your loans are federal student loans, the government offers Direct Consolidation Loans. These loans have fixed interest rates which is based on the weighted averages of the interest rates on the loans that you are consolidating, rounded up to the nearest 1/8 of a percent. In most cases the interest you would pay on a Direct Consolidation Loan will be much less then the interest rates you’re currently paying. Also, these loans offer different repayment options including several where your payments would be based on your income.

Q. What are the dangers of debt consolidation?

A. There are several dangers of debt consolidation. The biggest is what happens if you were to stop paying on your DMP, your credit card or your debt consolidation loan. If you have a DMP and miss a payment, nothing may happen. Some lenders will simply let you resume your payments the following month. However, some may drop you from the program immediately. Missing a credit card payment has very serious consequences as it could drop your credit score by as many as 100 points. But the worst alternative is to miss payments on a HELOC or home equity loan as the lender might actually foreclose on you – though most will sue you instead.

 

Do you qualify for debt consolidation?

3 Signs That Consolidating Debt Will Just Waste Your Time

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man with credit cardsConsolidating debt is one of the solutions that can effectively solve credit problems. However, you need to understand that it is not necessarily true for everyone. Some people may find out that debt consolidation loans is the best way for them to achieve debt freedom. However, some consumers will not have the same experience.

When selecting a debt solution for your credit situation, you need to be sure that you are using the right program. If not, you may find yourself wasting your time, effort and money on a solution that does not fit your financial situation in the first place.

The truth is, consolidating your debt is logical. Why will you complicate things when you have the option to deal with just one debt instead of multiple ones?

The NewYorkFed.org revealed early this year that the household debt in the country increased by $117 billion towards the end of 2014. That means the total household debt is now at $11.83 trillion. The data revealed that the increase happened in almost all kinds of debt – mortgages ($39 billion), student loans ($31 billion), auto loan ($21 billion) and credit cards ($20 billion).

In most cases, households have all of these credit problems. Mortgages, credit cards and student loans are among the prominent debts in every American family. When you are managing your credit, you need to keep track of all these accounts, due dates, minimum payment requirement, interest rates and other charges. It can all be very confusing at times and if you are not careful with your monitoring, you can end up forgetting payments. That can lead to a late penalty charge and a possible negative effect of your credit score.

If you can relate to this problem, then consolidating debt may have already crossed your mind. But before you finalize your decision to use this debt solution, make sure that it will not waste your time first. Fortunately, there are three signs that will help you realize if this is a solution you can pursue or not.

3 signs that debt consolidation is not the right debt solution

If you need to make sure that consolidating debt is the answer to your credit difficulties, you need to make sure you do not exhibit these three signs.

You need a debt reduction.

Let us make one thing clear: debt consolidation loans do not pay off your debt. It is true that you will use the loan to pay off and close the multiple debts that you owe. But after all of that, you need to remember that you still owe the same amount of money. You simply restructured your debt so it is under one lender. If this is not enough for you, then you need to reconsider a mere consolidation of your debts.

According to an infographic created by TransUnion and published on PressPage.com, the average credit card debt during the first quarter of 2015 is $5,142. That is a huge amount to pay off. If you add to it mortgages, auto loans and student loans, you could very well be drowning in debt at this point. You need to be very honest with yourself about your ability to pay off your debt. Can you afford to pay off your loan or do you need a debt reduction?

You do not have a stable income.

One of the requirements of debt consolidation loans is a stable income. You should not only have a steady income each month – you need to be sure that you will be having it for a couple of years in the future. A benefit of consolidating debt is you can lower your monthly payment requirement. Ideally, the debt consolidation loan that you will get should have a longer payment period so you can stretch your current balance over that time. The result will be a lower payment contribution each month. This longer payment period means you should have the resources to support your contributions. A stable income is the answer to that. If you are earning an irregular income or you only have a temporary job, you need to reconsider if debt consolidation loans is the answer to your problems.

You want to get out of debt fast.

The third and last sign that you need to look out for is your intention to get out of debt fast. If you want a fast relief from your debt, you may want to look elsewhere for your debt solution. Debt consolidation sometimes take a long time to finish. This is especially true if you combined certain debts like your credit cards with your mortgage. A home loan takes more than a decade to complete. If you are retiring soon, you probably want to finish paying off your debts as soon as possible. That way, you will have enough time to save up for your upcoming retirement. According to an article published on Fool.com, four out of ten baby boomers do not have anything saved for retirement. If you are in this situation, you need to get out of debt fast so you can maximize your extra money and add it to your retirement fund.

Apart from these signs, you also have to consider other factors like the type of debts that you owe. Consolidating debt that has a low interest already may not save you money – especially if the loan you will get has a higher interest rate than your existing. Loans with prepayment penalties may also be better off left alone and not consolidated.

Settle debts instead of consolidating them

There are other options to get out of debt if you think that debt consolidation loan is not the right solution. If you need a debt reduction and you want to get out of debt because you know that your income is not stable, then you may want to consider debt settlement instead.

Settling your debts involves an agreement between you and the creditor or lender that will allow you to pay only a portion of your current balance. What you will do is to negotiate so you can pay a settlement amount that is just a percentage of your balance. Once this amount is met, the creditor or lender will forgive whatever is left of your debt. It is like paying your debt pennies for every dollar.

While this debt reduction is very appealing, there are a couple of things that you need to understand about debt settlement.

  • You need to be in a financial crisis. It is important to note that only people who are in a financial crisis can find it easy to settle their debts. No creditor or lender will take notice of your proposal to settle unless your loan is already on default – or you have gone months without paying off your loan. If they know that you can still afford to pay each month, they will not settle with you. But if you can prove that you are in a financial crisis, things will be easier for you.
  • The decision to settle is in the hands of the creditor. Regardless of how strong your proof is that you are in a financial crisis, debt settlement will be completely under the discretion of the creditor or lender. There is no law backing you up here. So if they decide not to grant you a settlement, there is nothing that you can do about it. Your creditors consider your loan payments as part of their profit. If they allow you to pay only a portion of that, they are cutting into their earnings.
  • Debt settlement can ruin your credit score. Since creditors will hardly pay attention to your settlement proposal unless you are on default, you can expect that your credit score will not go unscathed. Regardless if you are successful in negotiating a lower payment or not, you will always end up with a damaged credit score.

The road to debt freedom, whether that is through debt consolidation loan or debt settlement, will always be tough. You need to make sacrifices if you want to eventually have financial freedom. But if you choose the right debt solution, it will be easier and less damaging.

Here is a video that will help you make better decisions about your personal finances.

Do you qualify for debt consolidation?

How To Get A Debt Consolidation Loan From A Bunch Of Complete Strangers

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Surviving Debt Despite UnemploymentSo there you are buried under a pile of credit card debts. The credit card companies have been calling you regularly and you’re even receiving nasty calls from a debt collector. You wish you could get a personal loan from your bank but your credit is so bad there’s just no way it’s going to lend you any more money You’ve heard there’s such a thing as a home equity loan but you don’t own a home. Or maybe you own a home but you don’t have much equity in it. You’ve actually thought of going to “Uncle” Vito for a loan but you don’t know an Uncle Vito. You’re certainly not going to ask any member of your family for money, as that would be just too embarrassing.

Why consolidate debts?

The reasons why debt consolidation makes sense are pretty simple. Your debts would be easier to manage because instead of having to remember and pay multiple creditors every month you’d only have one payment to make. Second, the payments on a debt consolidation loan should be much lower than the sum of the payments you are currently making. Third, a debt consolidation loan will have a longer term or more years to repay the money. Fourth, if you could get an unsecured loan you would not be risking any asset such as your house. And last but not least this would get all those creditors and that debt collector off your back.

How to get a debt consolidation loan from a complete stranger

Believe it or not you could actually get a debt consolidation loan from a complete stranger. And no, that doesn’t mean walking up to someone on the street with your hand out asking for money. It’s a new way to borrow money called peer-to-peer lending or social lending and it’s already helped thousands of people. The simple explanation of it is that you put in a request for a loan on one of the peer-to-peer lending sites and then sit back to see if anyone or any group of people will fund it. One way to think of it is that there’s a door under which you slip your loan application. If it’s funded, the money then magically comes out from under the door. You have no idea who funded your loan nor do the people that funded it know who you are. The computer does everything so you never have to face someone and ask for money only to get turned down. The worst-case scenario is that your loan isn’t funded but on many of these sites you have the option of polishing up your application and trying again.

The application or profile

Some peer-to-peer sites call your loan request an application while others call it a profile. In either case you will be required to provide information about your employment, your earnings, how much money you need and what you will do with the money. In addition, you will be required to provide some personal information such as your Social Security number.

The site will verify the information you provided. If everything checks out, you’ll then be required to provide information about your bank accounts. The reason for this is that so if your loan is funded, the money can be electronically transferred to your account and the money payments required to repay the loan can be taken out as automatic withdrawals.

Cross your fingers

Once the information you provided has been verified your loan will be listed – probably for 14 days. Potential lenders will review your information and decide whether or not to invest in you. If your loan is funded it’s likely that the money will come from multiple lenders. For example, on one of these sites many of the lenders are allowed to invest only five dollars in any one loan. This means that if you were requesting $1000 it would take 200 lenders to fund the loan. While you might think that this would be impossible it actually happens every day.

The advantages of a peer-to-peer loan

One of the biggest pros of a peer-to-peer loan is that it’s possible to get one for just about any reason you can think of – in addition to debt consolidation. Many people have gotten these loans to pay for a vacation, a wedding, a boat, to repay a student loan or even to start a business. Most peer-to-peer sites offer loans from $1000-$35,000. So if you need just $500 to satisfy an angry creditor then peer-to-peer lending probably isn’t for you.

The bigger the risk the higher the interest ratepercentage

A second advantage of one of these loans is that you might be able to get one even if you have bad credit. This is due to the fact that there are hundreds of investors on one of these sites and some of them that might be willing to gamble on you. In return they will probably require an interest rate of 19%, 20% or even more – to make up for the risk they’re taking.

Anonymity

A third advantage of a peer-to-peer loan is anonymity. The lenders will never know who you are. If you’ve been struggling with debt and have been turned down by your bank or credit union you know that this can be a bit embarrassing. If you apply for a peer-to-peer loan and it’s not funded it wouldn’t be as bad as being told “no” by your personal banker.

Less paperwork

Another good thing about peer-to-peer loans is that you’re not required to fill out and submit a whole stack of forms as would be required by a bank or credit union. The application process is pretty simple and it’s all done online. You may also find out whether or not you get your loan much quicker than is typical with a traditional lender. Once your application has been approved and your loan request listed you’ll have your answer within 14 days and probably quicker.

The major peer-to-peer sites

These sites have become “hot” recently and a number of companies have jumped into the business. However, as of this writing there are only two that are really significant. They are Lending Club and Prosper. Of these two, Prosper is the oldest while Lending Club is the largest. In fact, it’s currently not accepting new lenders because it’s going through an IPO (initial public offering).

Choose one and get started

If you think a peer-to-peer lending site could help you get the debt consolidation loan you need, choose one and get started. As you have read, the application process is fairly simple and if you have less-than-great credit you might stand a better chance of getting a loan on one of the sites than from a conventional lender. Plus, there’s just something kind of cool about getting a loan this way – from a complete bunch of strangers.

Do you qualify for debt consolidation?

Debt Relief Options For Different Financial Situations

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Debt Relief Options For Different Financial SituationsThere are many debt relief options to help you get out of your current financial crisis. Of course, it all begins with you understanding what got you in this situation in the first place. This will help keep you out of debt and also allow you to achieve debt freedom a lot faster.

Once you have identified that, you may want to take a look at your finances and the type of debts that you owe. There is no shortage of debt solutions. However, you need to know the right program that will suit your problems best. There is no one formula and to maximize your limited resources, you need to base your debt relief program on how much you can afford to pay your debts.

There is a specific solution depending on your financial situation. Each of our status is unique but we usually fall under one of three categories when it comes to our debts.

Before you find the category and debt solution that suits you best, take a look at your budget first. Identify your income and expenses (excluding debts) and get the difference. Whatever is left will be the disposable income that you can allot for your debt payments.

Debt relief options for people with money for minimum payments

The first financial situation is having enough disposable income to cover your minimum payments. The extreme scenario is having a little deficit on your monthly bills – but nothing significant. If this is your financial standing, you can afford to use a debt consolidation loan to solve your problems. The benefits of this includes the following:

  • Lower monthly payment

  • Possible lower interest rate

  • Longer payment period

  • Single monthly payment

  • Does not affect your credit score.

What you have to know, which is important too, is that this option will not reduce your principal balance. The lower monthly payment is possible because your current balance is stretched over a longer term. The lower interest rate is also responsible for this. But in terms of reducing what you owe, there will be none of that. You will still end up paying for everything that you owe. This means a steady and stable income is needed. You should also boost your savings so that you can meet your debt payments without a problem. This program takes 5 years or more to complete so you need to be sure that your income can keep up with such a long payment period.

There are two popular ways to consolidate your debts.

Debt consolidation loans. This option involves getting a low interest loan that you will get to help you pay for your multiple debts. Once the loan is approved, you can simply go to your creditors, pay them all completely and just concentrate on the single payment that is required from this one loan. To maximize this option, you need to make sure you will get a low interest – which means you either have a good credit score or a collateral.

Debt management. In case you do not have the ideal credit score or collateral, you can use debt management instead of getting a loan. This option allows you to work with a credit counselor who will help you come up with a debt management plan that will contain your proposed lower payment terms. The counselor will present this to the creditor. When approved, you will send a single monthly payment to the counselor who will take charge of distributing the funds to your different creditors.

With the latter, you need to be careful about your choice of company. Make sure you brush up on your knowledge of the Telemarketing Sales Rule (TSR) to help you identify the legitimate companies from the not.

Best debt solution when you cannot make your minimum payments anymore

In case your financial situation cannot afford to meet your minimum payments, you obviously need a more drastic debt reduction plan. This is when debt settlement becomes the better option for debt relief. The whole idea of this program is to convince your creditor that you are in a financial crisis. You want them to allow you to pay only a portion of your debts and have the rest forgiven. This program will give you the following benefits:

  • Eliminate collection calls (if you work with a debt negotiator).

  • Reduce your current balance significantly.

  • Get you out of debt in 2-4 years.

  • Possible elimination of interest rate and other charges.

The catch here is that you need to default on your payments in order to convince your creditors that you are in a financial crisis. This would mean you have deal with a damaged credit score temporarily. Instead of paying your creditors, you will send your money in a secured account and grow it there until you and the creditor comes into an agreement.

While you can do this on your own, you will get a lot of benefits by getting a professional to work with you. The debt negotiator will bring their expertise into the whole process. You will also be left in peace because part of their service includes taking over communication calls. Just make sure that they are certified by authority training organizations like the IAPDA or International Association of Professional Debt Arbitrators.

Credit relief for people in severe financial conditions

In case your conditions are quite severe, your last resort option is to file for bankruptcy. This means your income is barely enough to pay for your basic necessities or you have very little income coming in (or none at all). Most financial advisers will tell you to exhaust other options first before opting for this one. This will have severe effects on your credit score and that will make it even more difficult to recover after getting debt freedom. Having bankruptcy on your credit report will make it hard for you to get financial assistance for a home or a business that you want to put up.

When you file your petition, the court will assign the type of bankruptcy that you qualify for. This involves the means test. If your income is lower than the state average, you can qualify for Chapter 7 wherein your assets will be liquidated and anything that does not get paid will be discharged. If your income is above the average, you qualify for Chapter 13. This means you will be subjected to a repayment plan. This type of bankruptcy is not so different from debt settlement.

The US Courts website hold a lot of information about bankruptcy that will help you understand the whole process. It is best to gather information first so you know your options very well. That will help you make smart choices about your debt solution.

Consult with a debt relief expert to discuss all your options

National Debt Relief, a BBB accredited business, has debt relief experts standing by during extended business hours to explain all your debt relief options and find a plan that is right for you and your specific financial situation. You get a free debt analysis with no obligation and no judgment. Click here to speak with a debt relief expert or call 888-703-4948 today.

Do you qualify for debt consolidation?

How To Talk Your Way Out Of Debt

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woman looking at her credit cardDid you know that you could talk yourself out of debt?

Yes, really you could talk your way out of debt.

The solution is called debt negotiation, debt settlement or debt arbitration. But whichever you call it, it’s basically the same thing. It’s where you contact your creditors and talk them into helping you get out of debt.

Sound too good to be true?

Does this sound just too good to be true – that you could just talk your creditors into helping you? Well, it is true but only under certain circumstances. For one thing it’s not worth trying unless you owe a good amount of money. And second, you should already be behind in your payments.

How it works

For the sake of an example let’s say you owe $5000 on a credit card and you haven’t been able to make a payment for the last three months. Before you contact the credit card provider you need to have a goal in mind. It could be to get a reduction in your interest rate, to ask for forbearance (where you make no payments for some period of time), a temporary reduction in your payments or to settle your debt for less than you owe (debt negotiation).

The first thing you will need to do is get through to a person that has the authority to work with you. In many cases this isn’t as easy as it might sound. The first customer representative you reach probably won’t have that authority. In fact, you may have to keep making phone calls and talking with people until you finally work your way through all the various levels to get the someone who has the authority to really help you.

As a general rule it’s easier to get a concession such as a reduction in your interest rate, forbearance or a temporary pause to your monthly payments then debt settlement. Why is this? It’s because the whole idea behind debt settlement is to pay that credit card company less than what you owe – maybe much less than you owe. As you might guess, credit card companies are pretty much opposed to doing this.

If your goal is debt settlement

If your goal is to negotiate a debt settlement, you will need to be further behind in your payments than three months – probably something around six months. The reason for this is that most credit card companies are loath to talk settlement unless you’re this far behind. Plus, after six months most of them would sell off your debt to a third party such as a collection agency. This means it’s important that you contact that lender sometime between when you haven’t made a payment for five months but it hasn’t quite yet been six months.

Be honest

When you do finally reach a person that has the authority to help you be honest about your finances and explain them as clearly and comprehensively as possible. What you’re doing at this stage is building a case for settlement. You may also need to convince that person that if he or she fails to settle you will have to to file for bankruptcy. This is the old “half a loaf is better than none” deal where the credit card company understands it would be better to get a substantial chunk of what you owe than nothing at all.

What to ask for

Unfortunately there’s no hard and fast rule as to how much of your debt you should first offer to pay. If you have the necessary intestinal fortitude you might offer to pay 30% or 40% of your debt. You can just about figure that this offer will be refused. However, your customer rep will have to come back with a counter offer – after all this is called debt negotiation. Where you end up will depend largely on how good a negotiator you are and how much you owe. But if you are pretty good and if you do owe $5000, you might end up settling for 50%.

Get it in writing

Assuming that you are successful in talking your way into a settlement make sure you get it in writing. Also be prepared to pay for the settlement almost immediately. In fact, this can be one of your best bargaining chips – “settle with me today and I’ll send you the money by cashier’s check or wire transfer tomorrow.” Of course, this does mean you will need to have the necessary cash on hand. The Catch-22 here is that if you did have $5000 on hand you might not have to ask for any concessions let alone debt settlement. So where would the money come from? If you are fortunate you might be able to borrow it from a relative. Barring that you will need to get creative. For example, if you have a 401(k) or IRA you might be able to borrow the money from it. The best thing about this is that you will have to pay the money back with interest but you will be paying interest to yourself. And you will need to repay it within six months or it will be treated by the IRS as ordinary income and you will be taxed accordingly.

What can you do if you don’t have either a rich relation, a 401(k) or an IRA? You could get a second job and use the extra income to pay off your settlement. Our economy has rebounded to the point where there are a number of part-time jobs available. For example, we recently saw that both our local Best Buy and Staples stores were looking for help. While these jobs generally don’t pay more than $10 an hour you should be able to easily net $600 a month or more.

Does this sound just awful?

Make no mistake about it; DIY debt negotiation takes time, patience and steel nerves – as well as the cash to pay off any settlements you negotiate. Plus, it will seriously ding your credit score. This is why debt settlement should be low on your list of ways to deal with your debt.

Bankruptcy is worse

The one thing that can be said without argument about debt settlement is that it’s better than filing for bankruptcy. Yes, a chapter 7 bankruptcy would get rid of all or almost all of your unsecured debts such as medical debts, credit card debts and personal loans. But it comes at a very serious cost. For one thing, a bankruptcy will stay in your credit reports for either seven or 10 years and in your personal record forever. You could be turned down for a really great job 10 years from now because the prospective employer won’t hire anyone that has had a bankruptcy. It will probably be two to three years after your bankruptcy before you can get any new credit and when you do it will come with a very stiff interest rate.

couple with debt management consultantA better option

This means that for many people a better option is credit counseling. There’s undoubtedly a nonprofit credit-counseling agency near you that either provides its services free or at very low cost. When you go to one of these agencies you will be assigned a debt counselor that will review all of your finances and help you develop a budget or plan for getting out of debt. He or she will probably also work with your creditors to get your interest rates or even your monthly payments reduced. If you’re really stuck in a black hole of debt your counselor will probably offer you what’s called a debt management plan or DMP. This is where you send the agency one payment a month and it then distributes the money to your various creditors. The benefit of this is probably fairly obvious – that you get all of those creditors off your back and would make just one payment a month versus the multiple payments you’re probably now making. However, like many things in life there are downsides to a DMP. For one thing, it will probably take you as many as five years to complete it. And second, all of your accounts will be closed and you will be required to give up your credit cards. Sadly enough a large percentage of people who sign up for DMPs never complete them and these are probably the reasons why.

Do you qualify for debt consolidation?

Good News: You Can Have Your Own Government Stimulus Package

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money raining on womanThere was much talk a few years ago about the government stimulus package. It was a $787 billion bill termed the American Recovery and Reinvestment Act of 2009. It contained a huge array of spending projects as well as tax breaks designed to stimulate a swift revival of the US economy. The theory behind this package was Keynesian economics, which teaches that increased government spending can lessen the effects of a recession.

It may or may not have worked

Whether or not the American Recovery and Investment Act actually lessened the impact of the recession we were suffering is still up for debate. There are those who believe that it was successful while others say it was a waste because most of the money was used to pay down debts and reduce borrowing. Be that as it may it did lead to one thing that could be your own government stimulus package. It’s called the Home Affordable Refinancing Plan or HARP.

Never a better time

Thanks to HARP there has literally never been a better time to refinance your home. This is because you could use HARP to refinance it at an amazingly low rate and in doing so reduce your payments by $3000 a year or even more.
Would you be eligible?

To be eligible for HARP you would need to have a mortgage for $625,500 or less – unless your home is in a high-cost area in which case the loan limits might be higher. The whole idea behind this program is that the federal government wants banks to cut your mortgage rates to put more money in your pocket, which is good for the economy.

Unhappy banks

Of course, the banks are not very happy with HARP because it means you could shop several different lenders and not just your current mortgage holder. In addition, your home’s loan-to-value ratio (LTV) can be 80% to 125%. Banks would rather keep you at the higher interest rate you got when you financed your mortgage many years ago. In fact, this is such a good deal that it’s practically a no brainier to jump on HARP now. But you will need to act quickly if you want to refinance your house at these current low rates.

The benefits

Most Americans that do a refinance through HARP save $250 a month. Could you use an extra $250 a month? We thought so. Depending on your current rate you might even be able to shorten the term of your loan. And what typically happens is that one or two payments are deferred or skipped, which would put even more money in your pocket.

Where do you find these low rates?
There are several free websites where you can compare the rates on mortgages and then choose the lowest one. This, of course, is one of the best things about the Internet. It allows you to do business with banks and other lending institutions all over the country – not just in your city or state. One of the biggest and best respected mortgage refinance comparison websites is RateMarketplace.com. It is one of the few online companies that have HARP lenders in its network.

There is no cost or obligation to use RateMarketplace.com and its service is both easy and fast. In fact, it will take you only about five minutes to calculate what your new payment would be. The service is free. You can also calculate what your payments would be if you chose to refinance with cash out, consolidate your debts, get a home equity loan or buy a house. The net/net of using RateMarketplace.com is that you have nothing to lose but maybe your high mortgage interest rate.

Speaking of debt consolidation

If you feel as if you are sinking in a quicksand of debt and have equity in your house, one good solution is to use that equity to consolidate and pay off those debts. Many people have found debt consolidation to be a good way to get their finances under control. While a debt consolidation loan can come in the form of a secured loan, an unsecured loan or even by borrowing from your retirement plan, the best idea is probably to tap into the equity in your home because you end up repaying yourself.

The two types of home equity loans are a straight home equity loan and a home equity line of credit or HELOC, which resembles a credit card in that you pay interest only on the amount of money you withdraw. Most HELOCs have a variable rate of interest and low minimum payments. If you are approved for a HELOC you will probably have 10 years to take out the equity and then another 15 to 20 years to repay it.

man pushing a wheelbarrow full of moneyHow much could you borrow?

How much you could borrow to pay off your debts usually depends on a combined loan-to-value ratio of 80% or 90% of the value of your home. Naturally, the interest you’re charged will depend on your credit score and how good you’ve been about making payments on your debts.

A lower rate of interest

One of the biggest advantages of a home equity loan is that the interest on it will be less than the average interest of your current debts. These loans are relatively easy to get if you have equity built up in your house. In addition, the interest you pay on a home equity loan or HELOC is deductible just as it is with a conventional mortgage — if you itemize your taxes. In fact, a home equity loan is the only type of interest you can deduct under any circumstances except for qualified student-loan interest.

The downside

The biggest possible problem with a home equity loan is pretty obvious. If you don’t repay the loan, there can be horrible consequences. If you can’t make your loan payments, you might lose your house. Your credit score will suffer dramatically and it may be some time before you can get any other type of financing.

Do a careful analysis

You can avoid this by doing a careful analysis of your cash flow to make sure you will be able to make that new payment every month. It’s also good to make more than the minimum payment required although this may not be important if you are using the money to consolidate high-interest debts that are causing you serious financial problems.

A hypothetical example

Here is a hypothetical example of how you could use a home equity loan or home equity line of credit to consolidate your debts. For the purpose of this example let’s assume you have the following debts:

  • $10,000 in high-interest credit card debt with a monthly payment of $172
  • A $4500 car loan with an 8% interest in a monthly payment of $330
  • $3300 in student ßdebt where you defaulted on the loan but that prior to this your monthly payment was $150.

Again for the sake of the example we will say that you have a 30-year mortgage on your house and $50,000 in equity. However, you still owe $100,000. This means that you have debts totaling less than $40,000 and could consolidate them with a home equity loan or HELOC, as you would be well under the 80% loan-to-value ratio. You would trade three monthly payments for a single, lower payment and the interest would be deductible. In addition, if you pay off those three loans, it will improve your credit – especially because that student loan you defaulted on will now be off your credit reports.

The net/net

A home equity loan or line of credit can be a useful tool if you are a responsible homeowner and need to consolidate your debts. One of these loans will provide easy access to capital at lower rates of interest, reduced payments and even a tax deduction. Unfortunately, homeowners who abuse these loans and don’t make their payments can literally find themselves out on the street.

Do you qualify for debt consolidation?

The Dos and Don’t of Loan Consolidation

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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.

Do you qualify for debt consolidation?

Three Ts Of Debt Consolidation Denial

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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.

Do you qualify for debt consolidation?

3 Reasons To Consolidate Debt And 3 Reasons Not To

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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.

Do you qualify for debt consolidation?

Debt Consolidation Programs – 3 Important Questions To Ask

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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.

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.

Do you qualify for debt consolidation?