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What is debt Consolidation?
Consolidation of debt is the process of taking several different loans from different lenders, often at high interest rates, and replacing those debts with a single loan. Often, consolidation loans can be acquired at lower interest rates than the loans they replace. The result is a single monthly payment that is usually lower than the sum of the original loans.
It may be necessary to obtain such a loan through a credit counseling service. Try to find a reputable credit counselor, as there are many scam artists in the market, trying to take advantage of people in desperate situations.
The best way to consolidate loans, if possible, is to obtain a home equity loan. This is a loan that uses the equity in your home, (the portion for which you have already paid) as collateral for the loan. Home equity loans often come with very low interest rates, especially when compared to the interest rates charged by credit card companies. The interest rate for a home equity loan could easily be half as much as what you are currently paying! In addition, the interest paid on home equity loans is usually deductible from your Federal income tax. You should consult with your tax preparer regarding this.
If it isn’t possible to obtain a home equity loan, you can also apply for an unsecured personal loan at your bank. It’s usually harder to obtain such a loan, and the interest rates aren’t typically as favorable, but such a loan would still allow you to consolidate your debt at a lower interest rate.
Combining several bills into one large one and borrowing at a lower rate of interest, you can reduce your overall monthly payment, sometimes by as much as several hundred dollars!
Many people fail to realize just how expensive credit card loans can be, especially if they only meet the minimum payment requirements each month. A $5000 loan at 18% interest could take eighty years to pay off if you only sent in the 2% minimum payment each month.
No one wants to take eighty years to pay off their boat, so it’s clearly a good idea to pay more than the minimum. A consolidation loan makes it easier to do this. Lower payments mean that you can pay more each month, and pay off the balance sooner.
How do you avoid this? Choose your lender carefully, and make sure that they understand how much you can afford to pay, and how long you would like the loan to last. Competent lenders and credit counselors can usually find a financial repayment plan that works for you. After all, it’s in everyone’s best interest for you to pay your bills. You win, your creditors get paid, and your credit counselor has the satisfaction of having helped another client avoid bankruptcy.
More on Debt Consolidation Below:
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