Debt Consolidation in 3 Easy Steps
Debt consolidation allows you to do just that, consolidate your debt. Usually this means a lender will roll your current debts into one loan, allowing you to secure a fixed interest rate. Most often, you will be able to combine all your high interest rate loans and credit card debit into a single, lower-interest rate secured loan.
If you are currently looking to consolidate your debt there are a few steps youll need to go through in order to facilitate the process. Youll need to understand your debt. To do that:
1) Make a list of your current debts. In addition to the large loans like your mortgage and car loan, make sure to include all personal loans, student loans, and credit card debt.
2) Within your list above, add columns for balance due, current interest rate, and monthly payment. This will allow you to understand the total amount of your debt.
3) Then calculate how much money you will wind up spending for the debt over the duration of the loan. Keep in mind that this number is only a snapshot of your current financial situation. If you are continuing to add to your debt, incurring more debt on your credit cards, buying a new car, etc, your debt will continue to grow.
Once you understand how much debt you have, you will need to consider what type of debt consolidation loan is best for your circumstances.
One of the easier debt consolidation methods available today is to transfer all your credit card balances to once card. Often credit card companies solicit your business with a low APR on transferred balances. You should also review all your current cards and contact the card that has the lowest APR and see if they can match or better the deal you would get with a new card.
You might also consider refinancing your current mortgage or taking out a second mortgage. The obvious disadvantage to this type of loan is that you are putting your house up as collateral, and decreasing the amount of equity you have in your home. On the plus side, interest on loans secured by property is usually tax deductible.
You may also wish to consider asking family or friends for a loan. If they are in a position to do so, this can often be advantageous for you. Personal loans of this nature tend to be more flexible and forgiving than those through conventional methods. If you go this route, it is a good idea to write out the terms of your agreement, including interest rate and repayment schedule. This will help to avoid any potential for confusion in the future.
There are also many non-profit services performing debt consolidation. These services will work out a debt repayment plan for you. They renegotiate the terms of your existing debt, consolidate it for you, and you wind up writing a monthly check to them. If you decide this is a good option for you, make sure to investigate the company you will be going with before signing anything.
After youve considered all the debt consolidation loans available to you, you should look at the bottom line. It is possible that your new loan will cost more over the long term. If this is the case, and you can make your current payments, it may be advisable to do so, even if the payments are higher today than they would be after debt consolidation.
You should also make sure to review how much the loan will cost to acquire. Some loans require upfront fees, some recurring fees. Are there points, closing costs? What is the interest rate you will be charged? Is it fixed or adjustable? If this is all a little too confusing for you, enlist the aid of a financial advisor to help you determine which loan is best for your.
When youve secured a loan, make sure to read the loan documents carefully. You want to ensure that the terms and interest rate are as you had originally agreed. You also want to make sure you are not being charged any additional fees.
Tags: Personal finance, debt consolidation, debt consolidation programs, debt