DEBT CONSOLIDATION

Examples of Wise Debt Consolidation

Examples of Wise Consolidation

Your debts consist of:

gas card with a balance of .$400 at 18%
Master Card balance of…$6,000 at 14%
VISA balance of…………… $8,000 at 15.9%, and
department store card of $6,500 at 22%.
You owe a total of………. $20,900.

Your local bank charges 12% interest for home equity loans and has an $800 loan origination fee. Your strategy might be to borrow $20,900 with an equity loan from the bank to payoff all your balances, and close out the accounts. Now you’ll still owe $20,900 but at a lower APR of 12%. Also, at the end of the year, you are usually allowed to write-off the interest you paid, effectively making your APR even lower. Most equity loans are 15 year notes, so try to send in extra principal every month to accelerate that payoff time. Make sure your bank allows pre-payment and extra principal payments.

What if you Don’t Have Enough Equity to Consolidate all Debts

But supposing you only have $7,500 equity in your house. How can you consolidate all your debt with $7,500? You can’t, you’ll have to choose which accounts to payoff. The department store and gas card have the highest APR, so shoot for those. You’ll need to borrow $6900 with your equity loan. There is no reason to borrow more, and you should not either.

Sure you would like to buy down some of the interest with your equity, but if you don’t have enough to pay it off and close the account, then there is a very high risk that you’ll just run the balance back up again. Some accounts you can close, then just continue to pay them off, then you’re OK using the remainder of your equity balance to buy down whatever you can on the balance. But we cannot stress the importance enough that you must not let your balances go back up. Consolidation loans and equity loans are potentially dangerous in the wrong hands because you are adding another channel of credit, so use it wisely, and always be fully aware of what you are doing.

If you take out a consolidation loan, consider these simple rules:

NEVER, EVER, EVER, SIGN A CONSOLIDATION LOAN WITHOUT FULL DISCLOSURE IN WRITING OF:

1) The principal amount that you are borrowing.

2) What the interest rate APR will be.

3) How many payments you will pay.

4) Closing costs, if any.

THIS SHOULD BE CLEARLY SPELLED OUT IN THE CONTRACT. IF IT’S NOT ON THE CONTRACT, DON’T SIGN!

If you don’t know how to check their math and verify the monthly payments, don’t sign the loan papers, you have no business taking out a loan. You’ll have no recourse later because in court they’ll just say “you signed the loan”. Verbal statements or claims made by salespeople do not hold up in court. There are many unscrupulous “lenders” out there who prey on people who are naive or have bad credit. They’ll offer you the world to get you to sign up to their program.

If you chose a consolidation loan instead of a consolidation plan, be sure you use the entire amount of the loan to payoff your accounts, and close all the accounts you are paying off. DO NOT keep any cash for yourself to spend. Use all the funds to payoff the debt. No clothes buying, no dinners, no trips, no nothing. Borrow just what you need to payoff your accounts.

Consolidation Loans or Consolidation Plans

Consolidation Loan: A lender lends you money to payoff your bills. You payoff all your credit cards and other debt, now your payments have all been consolidated into just one monthly payment to the lender, hopefully at a lower average APR than your current bills. You should close out all the accounts you paid off with your consolidation loan, so you don’t run up the balance again.

Consolidation Plan: A “bill paying service” that has the influence to work with your creditors to reduce or eliminate your interest and late fees, and agrees to send them your payment every month. You in turn pay the “bill paying service” a monthly payment equal to the amount of all your accounts in the plan, plus a service fee, and maybe interest if they could not get all of it removed. This should hopefully cost much less than your total payments before, since most credit cards will drop the interest rate to 0.

Notice that no one is lending you money, they are just restructuring your debt, which is safer. Don’t confuse these companies with lending institutions, or banks, they are not lenders. Usually car loans, home loans, and other secured personal loans cannot be brought into this type of plan because the bill paying service cannot get banks to relax the interest. This type of plan usually works best on credit cards, gas cards, and other types of credit.

The Proper Way To Use Consolidation Loans

Consolidation loans are not for everyone and can be dangerous if you aren’t careful. There’s a lot of people who don’t pay attention when they consolidate their loans. Sometimes the interest rate can be higher than the total APR on your current debt. Some unscrupulous lenders charge an enormous up front fee that they don’t go out of their way to tell you about. Some of these same lenders might even roll the fee into the loan payments. If the loan’s APR is higher than your credit cards, you’ll lose money and should not close on the loan.

Don’t consolidate just for the sake of consolidating. The word is misleadingly dangerous. Your brain tricks you into thinking that consolidation means less. Most people think a consolidation loan means they’ll pay less, but that may not be the case. Consolidation just means that the monthly payments from your creditors will be consolidated into one payment to one lender.

Basically you can’t just borrow your way out of debt, you must pay it off. A consolidation loan should only be considered if the interest rate is less than all the credit you owe AND you close out all of the accounts you paid off.

Consolidation loans are DANGEROUS for impulsive people because all you are really doing is shifting all your debt from one place to another, effectively OPENING ANOTHER CHANNEL OF CREDIT, while freeing up your credit cards. Some people then proceed to fill up their credit cards again, now they have double the debt they started with, and they are paying up to 22% on their consolidation loan because they weren’t paying attention to the APR when they signed up.

Some consolidation lenders are unscrupulous and make it appear they are eliminating your debt, when you are really taking on more debt. They might offer you a lower payment, but check their math and you might discover that it ends up costing you more than your original bills. Don’t fall for this! Always check their numbers.

Don’t let the lender trick you into thinking that lower monthly payments mean less interest. They could have a high APR and stretch the payments out over a long period of time, which is costing you more in the long run. Car dealers use this trick all the time on car loans. You pay more interest when your payments are stretched out to 60 months.