Debt Consolidation

Debt Consolidation is the most misunderstood term in the debt relief industry.  Much confusion exists over what a Debt Consolidation company really does and how it differs from other forms of debt relief.

1.  Some confuse it with Credit Counseling but since there are loans involved it is not Credit Counseling.

2.  Some attorneys advertise as debt consolidators but are really only Bankruptcy attorneys.

3.  Since the title “Debt Consolidator” has such a negative connotation in the public arena many companies advertise as Debt Negotiators.  This is misleading since they work to reschedule your debt not eliminate it.

Is Debt Consolidation right for You?

Debt consolidation can help you get control of your money and reduce your overall debt. You can use a debt consolidation service, which will help you consolidate your debts without taking out another loan, or you can apply for a home equity loan in order to consolidate your debts into a single loan at a lower interest rate. But is a debt consolidation loan the right choice for you? That depends on your personal situation, how much equity you have in your home, and the real estate market in your area.

The Advantages to Debt Consolidation Loans

Debt Consolidation reduces the risk of late payments because you are only making one payment a month, rather than trying to keep track of several debts from different sources with different due dates. A single late payment can hurt your credit, but worse, it can result in you paying higher interest rates on ALL of your debts rather than just the one you paid late.

A debt consolidation loan can help you eliminate your credit card debt.

By taking out a debt consolidation loan, you can pay off your credit cards all at once, reduce your monthly payment, and save money on interest over the long term. A home equity loan will also have some tax advantages as some or all of the interest may be deductible.

The Keys To A Good Debt Consolidation Loan

For a debt consolidation loan to work:

  • The interest rate on the new loan should be less than on the debts you wish to consolidate.
  • The loan period (how long it takes you to pay off the loan) should be the same length, or shorter, than the previous loans. A longer term will increase the amount of interest you pay overall, and may make the consolidation loan more costly in the long run.
  • You should not be paying excessive fees, such as high closing costs or points or your decreasing or even eliminating any savings.

Questions To Ask Lenders

The Federal Truth-in-Lending Act gives you a legal right to be informed of all interest and fees that will apply to your consolidation loan. Take advantage of this law and ask questions so you can be sure you have enough information to make the best choice for you. Some important questions:

  • What is the Annual Percentage Rate?
  • Will it be fixed or variable?
  • How much interest will I pay over the life of the loan.
  • What is the monthly payment and the term of the loan?
  • What are the application fees?
  • Are there annual fees? How much are they?
  • Will there be closing costs? How much will they be?
  • Is there a discount for automatic payments?