Television commercials and mass mailings may make debt consolidation seem like a simple process. Often by the end of a 30 second ad, the formerly anxious, debt ridden consumer is smiling and shaking hands with a caring debt consolidation counselor, and all their problems seem to have vanished.
While there are many options available to consumers, the three most commonly advertised forms of debt consolidation are: credit counseling, debt management programs, and debt settlement. Consumers sometimes mistakenly assume that these options mean the same thing, involve the same process, and are interchangeable. This idea is wrong on all accounts.
Credit Counseling is often the first stop for those interested in eliminating debt. It is simply professional help to develop a budget, encourage discipline, and reevaluate spending. This is a good option for people who have a steady income, and have just made some poor financial decisions.
Counselors offer advice and explain your options, however, they do not cut your monthly payments, or reduce the amount you owe. They can contact creditors to lower interest rates, but you can do that yourself. Most importantly, credit counselors can help you to know when declaring bankruptcy is your best option. It is now necessary to meet with a certified credit counselor for six months prior to declaring bankruptcy.
Debt Management Programs are the way that credit counselors help to pay down your debts. They take one monthly sum, and redistribute it to cover all your bills. Basically, the counselor takes your paycheck, keeps what is needed to pay your bills, and gives you an allowance. These programs ensure that your creditors are paid, and you are making progress toward getting out of debt. Only about 35% of all the people involved in credit counseling qualify for a debt management program.
Debt Settlement is the third option available to consumers, but experts advise caution when using these types of programs. Basically, consumers make payments to the agency, where the money will sit until the creditors demand payment. The debt settlement agency will then renegotiate your debts agreeing to pay pennies on the dollar. The creditors usually agree to these terms, as the alternative is to receive nothing at all.
Frankly, this is a dangerous, and unethical way to go. First, you are not saving any money, as you make full payments to the debt settlement agency, who is earning interest on the held money. Second, if you miss even one payment to the agency, oftentimes you lose all the money youve paid to them as a fee. Finally, it is your credit, not the agency’s that takes a beating in the process; this option can reflect as poorly on your credit score as declaring bankruptcy.
Understanding the programs available to you is essential as you begin the process of debt consolidation. Credit counseling can be a great tool in helping to discipline spending, and create a plan for the future–just make sure you know what youre getting into.
If you’re thinking about using debt consolidation to get rid of your high-interest credit cards and other consumer debt, there are some things you should know first. It’s not always the best option.
I’ve just finished a special report about debt consolidation that outlines the good and the bad.
You can get more information about my Debt Consolidation Tactics report here:
One of the things people sometimes fail to consider when opting for a debt consolidation loan is the fact that they are trading what should be unsecured, short term debt for secured (by your home) long term debt. The immediate relief brought about by trading a slew of problems in for a lower interest rate seems to be a salve for your problems, especially when things are getting very sticky. But there are some good reasons to consider NOT taking out a debt consolidation loan, and we need to look at some of them in order to make rational decisions.
The primary reason to be careful when considering a debt consolidation loan is that if you have further problems down the road, this relatively small (compared to your house) unsecured debt becomes a really good way to lose your house. Not only this, but the cost of that money that was on those unsecured debts, whether they were credit cards, installment loans or whatever, becomes ever more expensive as the time frame for paying this off has magnified greatly because it either became part of a new mortgage or is tied into your house some other way. What could have been paid off in just a few years for modest amounts of interest now takes 30 years, and oodles of interest!
This should be taken into account. You might also consider whether it would be better to try and negotiate with your creditors, and avoid this type of loan altogether. Something to think about!
[widget:ad_unit-1221255277]One of the most common techniques for getting cash to help with credit card debt reduction is by tapping into the equity on your home. While this may be spending some of the profit you’ve hoped to make on your biggest investment, your home, it may well be the best choice among several other poorer ones. There are several things to bear in mind, however, as you consider whether a home equity loan or home equity line of credit (HELOC) would be right for you. Let’s look at some of those now.
First, some definitions: a home equity loan is an installment loan, just like your first mortgage or your car loan. You get a lump sum, and you pay this back according to a schedule, usually with fixed rates and payments. A HELOC on the other hand, is really more like another credit card than a home loan. You are set up with an account with a credit limit you can borrow from whenever you desire. You don’t have to have the entire amount allocated and costing you interest from the beginning. Rates are variable, and usually tied to the prime rate
Typically, a home equity loan is used for things like major home improvements, or to finance unplanned for events. What is becoming more and more in vogue these days however, is the practice of tapping a home equity loan for frivolous uses, because it’s easy to get, and there are no sources of other "fun" capital to play with. Not only is this dangerous to your ultimate state of wealth, but if you were to blow through this asset it may not be there when it’s actually needed. Some wisdom is required in knowing just when to use this. If you’re going to use this to pay down or off credit card balances, then do yourself a favor and make sure you don’t repeat the disaster.
When shopping for a home equity loan or HELOC, there are some tips you’ll want to remember, and the first of these is to go shopping! Don’t sign the dotted line with the first lender you call, unless of course you’re looking to be relieved of a lot of money! Rates will vary from company to company, and having lenders compete for your business is a good thing! Don’t ever be made to feel as though they’re "doing you a favor", and you won’t be able to find terms as good as these elsewhere. Yes you will.
This kind of shopping is especially good for your loan when it comes to fees. Make sure the lender isn’t tacking on any junk fees. If you have okay credit, you probably can get out of appraisal, application, and broker fees. Even if you don’t have great credit, all this is negotiable if they want your business.
A home equity loan or line of credit can be a good vehicle for addressing credit card debt. It can turn taxable debt into tax-deductible debt, and get you a fresh start. Just be sure and count the cost before you sign away any equity!
You’ve seen the ads everywhere you turn. "Consolidate your debts into one easy lower payment." "Interest rates killing you?" "Trade those high-interest payments in for a new low one!" They are pervasive on the television, and even worse on your email account. But are they advertising anything that is of real worth to you or is it just more fuel for the fire?
[widget:ad_unit-1221255277]The basic idea behind debt consolidation loans makes sense on the surface. The ability to bundle a large amount of loans and debt into one lower-rate loan sounds smarter, more convenient and a step in the right direction. Maybe.
There are categories for homeowners and non-homeowners, and the difference basically is that if you have any sort of substantial assets (a home) you can get better interest rates and terms overall if you are willing to put another debt on your home. If you don’t have anything of worth to back this loan up, you’ll be paying very high interest rates and in fact the payment may not be much different than you presently are paying. The rates you will be paying on a loan like this will depend on several things. Is the borrower a homeowner, and is the property used as collateral for the new debt consolidation loan? What other assets, if any can be used to secure the loan? What is the borrower’s credit history?
The concern with attaching your real estate to this type of loan as collateral is that while you may well be exchanging a higher rate for a much lower rate, (because of your home as collateral) the overall debt repayment may be many thousands higher at the end of the day. Not only that, but switching from unsecured debt to a secured debt makes your primary asset, (your home), vulnerable in the event of a further monetary disaster. In other words, you could lose your home, whereas you wouldn’t if the debt had not been attached to your real estate. The main point here is, think long and hard before encumbering your house. It may well be worth much more interest in the short term for a debt consolidation loan than to risk your most precious asset.
One of the primary dangers of credit card debt consolidation loans lies with the borrower. While a loan of this type may erase credit card balances overnight and the new loan may even be tax-deductible, the real danger lies in the behavior that got the borrower in trouble in the first place. Many times a borrower will use a loan like this, erase the high interest credit card debt, and then start racking up charges on those very same credit cards again.
If a debt consolidation loan is being considered, count the cost in terms of financial vulnerability, and try to see about changing the habits that led to this point in the first place. You’ll thank yourself later!