November 12, 2016

Is A Debt Consolidation Loan Right For You

Table of Contents

  1. How Debt Consolidation Works
  2. The Benefits of Consolidating Your Debts
  3. The Difference Between Secured & Unsecured Debt Consolidation Loans
  4. Debt Settlement vs Debt Consolidation
  5. Will Debt Consolidation Loans Affect Your Credit
  6. Whether A Consolidation Loan Is Right For You
  7. Calculate How Much Debt You Have
  8. How To Choose A Good Consolidation Loan
  9. Options For Getting A Consolidation Loan
  10. Paying Off Your Debt
  11. How To Stay Off Debt
  12. Conclusion

For those who are not familiar with debt consolidation loans, they are financial opportunities for people to consolidate all their loans into one new loan. Even though debt consolidation loans can help with a variety of different debts, they are most commonly used for people with multiple credit card debts. These loans help people who are struggling to pay even the minimum amounts on their credit cards.

How Debt Consolidation Works:

Keep in mind, debt consolidation loans do not change the amount of money you owe on your credit cards. It’s a loan that pays off your existing loans, replacing them with a singular loan that you will have to pay off. Hopefully, the consolidation loan will provide a lower interest rate and which will lower your monthly payments.

First and foremost, decide what you are able to pay on a loan each month. Also, understand if your payments are for secured or unsecured debts. Generally, consolidation loans are used for unsecured debts such as credit cards, medical bills or other bills that offer no collateral. Secured loans are for debts such as a mortgage or automobile. These items have collateral which means the items can be taken back if payments are not met.

The Benefits Of Consolidating Your Debts:

A consolidation loan can be a great benefit for those who are carrying heavy debts from many credit cards. A consolidation loan will pay off all the credit cards, in full, and then set up a new loan in their place. In many cases, the interest rate will be lower thereby making your payment lower.

  • You will not experience constant collection calls from all your credit card loans.
  • You will have just one loan to make payments on monthly.
  • You can improve your credit score over a period of time when you make timely payments.
  • You could possibly have a lower interest rate making it easier to make monthly payments.

The Differences Between Secured & Unsecured Debt Consolidation Loans:

Again, the big difference with a secured debt consolidation is the loan is tied to an asset such as a home, car or even property. These items are used as collateral in the event you default on your payments, the item can be taken away from you. Unsecured loans do no have assets and are usually based on your credit history and whether you are a high risk or not by lenders.

The Positive & Negative Sides To Secured Loans:

  • Are usually allowed a higher amount you can borrow.
  • They are easier to get because they are attached with an asset.
  • Usually offer lower interest rates.
  • Can possibly be tax deductible.
  • You are given a longer period of time to pay off the loan.
  • A Longer period of time can mean a higher cost in interest over time.
  • You can run the risk of losing your asset.

The Positive & Negative Sides To Unsecured Loans:

  • There is no risk of losing an asset.
  • A shorter period of time to pay off and lower interest over time.
  • There are no tax breaks.
  • They are harder to obtain if you are a higher risk borrower.
  • A lower amount will be provided.
  • Comes with a higher interest rate

Debt Settlement vs Debt Consolidation:

Debt Settlement:This is a negotiating process with creditors to settle debts for less than the original amount owed.  This is commonly used in order to settle a substantial debt or multiple debts with only one creditor holding the entire debt.

Debt Consolidation: This is taking several debts from several creditors and combining them into one in order to pay them off.  The goal is to have one payment that hopefully will amount to less than paying each one separately.  There’s also a possibility that the interest rate will be lower as well.  This is most commonly used by consumers having problems paying all their bills, credit cards, and other unsecured debts.

The Pros & Cons of Both: Debt settlements and debt consolidations vary, especially the amount of time it will take to get rid of debts and the overall impact on one’s credit score.  Both consolidations and settlements aim to make your debts a great deal more manageable.  When used correctly, either one can be a great help to get you out of debt as soon as possible and save you money.

Will Debt Consolidation Loans Affect Your Credit:

These loans can improve your credit score over time. They do give you an opportunity for improving your credit if you have a good plan instead of just moving debts around. Remember, when you take out a consolidation loan, your current credit card debts will be paid off and placed into a singular loan payment.

Most people who opt for a consolidation loan have already found their payments are in delinquency. If you make timely payments on the new loan, you will start seeing an improved credit score over time.

If your credit score is really poor, it’s advisable that you speak with a credit or financial counselor through a non-profit organization to see other options that might be available to you. A counselor might suggest a debt management program that will help you set up a budget and a loan that you will pay off within 3 to 5 years.

Whether A Consolidation Loan Is Right For You:

A consolidation loan will let you become debt-free in a relatively short period of time. Keep in mind, the only way this can really work is if you become disciplined and make sure you repay the new loan on time. Unfortunately, 50% up to 80% of people who consolidate their debt do not stay out of debt.

In order to make a debt consolidation loan to work, you must understand how to literally consolidate your debt.

Calculate How Much Debt You Have:

Make a list of your current debts and your monthly payments. This will give you a clear picture of how much you owe and what you are actually paying each month. This list should not include your mortgage. One – mortgages are called “unavoidable debt” and you cannot pay them off in the near future. Do Not attempt to pay down your mortgage but leave others debts on your plate, these other debts are not tax deductible.

Choose A Good Consolidation Loan:

Now that you are aware how much in debt you are, it’s time to find a plan that will work for you. If you are a homeowner, you could consider to consolidate your debt using the equity in your home. This choice will usually give you a lower interest rate because your home is a secured loan. The equity in your home is actually the only amount that you own. Paying down on the principal is one way to build the equity in your home and the other is through appreciation value over time. You can access this money and use it to pay off other debts.

Options For Getting A Consolidation Loan:

One of the best ways to get a consolidation loan is through a Zero-interest credit card balance transfer. If your credit is relatively strong, a credit card company might let you take all your credit card balances and put them on one card. These cards usually have no transfer fees or interest payments for a certain period of time. No interest payments usually last from 12 to 18 months and then after, if not paid in full, interest will be applied.

Another good option is looking into a credit union consolidation loan or an online lender. Qualifying for these loans are a lot less restrictive than through a bank. Your application is processed rather quickly and interest rates can be better than what you are presently paying. Also check out some other popular debt consolidations options below:

Compare Debt Consolidation Options

Balance Transfer Cash-Out Refinancing Home Equity Loans Unsecured Personal Loans
Low Interest Rate Yes No No Yes
Transfer Fee Depending con Creditors No No No
Application Process Quick and Easy Takes Long Time Takes Short Time Quick and Easy
Secured Loan No Yes Yes No
Tax Deduction No Depends Yes No
Upfront Cost Low High High Low
Repayment Terms Few months – 1 Year 1 – 20 years 1 – 20 years Few Months – 5 Years

*All options described above require good credit score in order to obtain low interest rate. Borrowers with poor or bad credit could get a worse rate than what they already have now. Please shop carefully.

Paying Off Your Debt:

Once you have chosen the best avenue for a consolidation loan, you must have a clear time frame in which you can pay down your debt. The first thing you need to do is consider where you want to be a year from now, 5 years from now, etc. Think about your short-term goals for the next few years. Ask yourself how much you can reasonably afford to pay each month. You really don’t want this debt hanging on for a long period of time, so set your goal to get it paid off as quickly as possible. If you can pay it off with a 10-year mortgage, don’t take out a 15-year mortgage because you will just be dragging it out and it will cost you more.

Stay Out Of Debt – Period!

The bottom line, control your spending habits. There is no magic wand that will make your debt go away but if you control your spending, it will increase the chances that you can live a debt-free life.

Show disciplined! The budgeting process is increasing your discipline in spending. When you understand how much money you are bringing in each month and how much you need for monthly expenditures. You might just realize you just don’t have a lot of cash to throw around. Until you pay off your debt, you might have to cut back on things like eating out every night or going to the movies once a week.

Some Suggestions:

  • Have a movie night at home.
  • Use coupons
  • Look for sales
  • Spend $10 on dry cleaning instead of $25 then use the surplus for a movie.

Budgeting might not be your first choice, but it’s the only choice if you want to become debt-free, Decide what expenses are really important to you, at this time and unload the others.

In Conclusion:

Not all financial problems can be solved with debt consolidation loans. There are times when you might have to make a debt settlement or a bankruptcy might be the only solution you have.

Before deciding on a consolidation loan and calculate your payments, understand what will be comfortable to pay, monthly. Take the bull by the horns and control your spending habits. If you want to be free of debt, it’s impossible if you keep up the same bad spending habits.

If you need help, it is highly recommended that you get with a financial counselor to help you set up a good budget plan and get you back on track. Many of these counseling services also offer counseling sessions to teach you good budgeting practices.

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