Debt consolidation loans
Your credit cards are maxxed out. Because of frequent late payments, your cards are charging you
outrageous interest rates of 22% or more. Despite your best efforts, your credit card balances
keep going up instead of down. What can you do?
First thing you need to do is to budget. By budgeting, you
identify where you're wasting money, and just how much of your hard-earned cash is being
frittered away on meaningless items. By doing a budget, you can cut those needless expenses, and
free up money to help pay down your debts.
You've heard and seen commercials from debt counseling and credit counseling companies. You've
heard their pitches and promises, and you wonder if they're the way out of your troubles.
Because you don't realize that you can get lower interest rates
yourself (thereby saving yourself thousands of dollars in interest payments), you think that the
only way to get caught up is to get some sort of debt consolidation loan.
A debt consolidation loan can help. But, if you're not careful, it can make your
situation much much worse.
Beware of the debt consolidation loan trap
Normally, the major reason behind our getting into debt problems is because we don't control our
spending. We consider our "wants" to be "needs". If you don't do anything to take control of
your reckless spending, you will be in deeper trouble, whether you get a consolidation
loan or not.
Some people look upon a debt consolidation loan as a godsend. They get the loan, pay off their
high-interest debts (usually credit cards), and faithfully make their loan payments. However,
they don't stop their wild and crazy spending habits, and continue to put "stuff" on their plastic.
Before long, their credit cards are maxxed out again AND they're making payments on their
huge debt consolidation loan. Upwards of 70% of all Americans who choose to get a debt
consolidation loan end up in this situation. At this point in time, you may be in so deep
that bankruptcy is your only way out. And many experts tell you to avoid bankruptcy at all
So, let's say that you've managed to get your expenses under control, and you decide to get a
consolidation loan. The lower interest rate of the loan makes you feel good. 10% is a lot better
than 22.9%! By consolidating, you ought to manage to get a monthly payment lower than
what you were paying on all the old debts. You won't necessarily get out of debt earlier (though
if you had been paying only the minimum on your credit cards you will), but you'll have some
What type of debt consolidation loan is best?
What sort of consolidation loan should you consider?
Personal loans are unsecured loans. Basically, solely on the strength of your signature and
reputation, you get a financial institution to lend you money. Unsecured loans tend to have
higher interest rates than other types of loans. Still, the rates should be less than what you're
paying on your credit cards. However, because of your credit problems (the late payments
mentioned above), you'll find it much harder to get an unsecured loan. And the interest rate
won't be as low as it could be.
An unsecured line of credit is a possibility. Lines of credit are better than loans because of
their flexibility. As you pay down the line of credit, you create "borrowing space" in case you
find yourself short on finances again. However, being unsecured, your interest rate will be higher
than a secured loan.
You can get a secured loan on the value of your car. The rate will be lower than an unsecured
personal loan because, if you default on the loan, the bank will seize the car. If one of the
debts you're trying to consolidate is a loan on the car though, this option will be a no-go.
You can get a home equity loan or a home equity line of credit. Depending on the real estate
market (and the flexibility of the lending institution), you can get a loan or credit line up to
the amount of net worth in your house. For example, if your house is worth $200,000, and your
mortgage balance is $120,000, some institutions will lend you up to $80,000. That loan is
secured by your house. Default on this type of loan, and you risk losing your house.
Lastly, you may wish to consider refinancing your house. Some mortgage lenders may be
willing to lend you 125% of the total value of the house. Given the example above, a mortgage
lender may lend you 125% of $200,000 less then amount you still owe on the existing mortgage.
In this case, it would mean you could get up to $170,000 ((125% of $200,000) - $80,000). But, as
before, if you default, you can lose your house.
Is there a better way?
Is it really worth the risk? By budgeting properly, and
negotiating lower rates on your credit cards, you can get
out of debt faster (and for less money) than by getting a home equity loan. If your home loan has
a ten year term, you'll be paying interest for ten years. By applying some common sense advice
and planning, you can get out of debt without borrowing more money and risking your house,
sooner and for less money! While a debt consolidation loan can help lessen your worries and
stress, paying down your debt by budgeting and credit card "tricks", will end your debt worries
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