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.
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