You are swimming in debt. You have 4 credit cards maxed out, a car loan, a consumer loan, and a house payment. Simply making the minimum payments is causing your distress and certainly not getting you out of debt. What should you do?
Some people feel that debt consolidation loans are the best option. A debt consolidation loans is one loan which pays off many other loans or lines of credit.
I'm sure you've seen the advertisements of smiling people who have chosen to take a consolidation loan. They seem to have had the weight of the world lifted off their shoulders. But are debt consolidation loans a good deal? Let's explore the pros and cons of this type of debt solution.
Pros
1. One payment versus many payments: The average citizen of the USA pays 11 different creditors every month. Making one single payment is much easier than figuring out who should get paid how much and when. This makes managing your finances much easier.
2. Reduced interest rates: Since the most common type of debt consolidation loan is the home equity loan, also called a second mortgage, the interest rates will be lower than most consumer debt interest rates. Your mortgage is a secured debt. This means that they have something they can take from you if you do not make your payment. Credit cards are unsecured loans. They have nothing except your word and your history. Since this is the case, unsecured loans typically have higher interest rates.
3. Lower monthly payments: Since the interest rate is lower and because you have one payment vs many, the amount you have to pay per month is typically decreased significantly.
4. Only one creditor: With a consolidated loan, you only have one creditor to deal with. If there are any problems or issues, you will only have to make one call instead of several. Once again, this simply makes controlling your finances much easier.
5. Tax Breaks: Interest paid to a credit card is money down the drain. Interest paid to a mortgage can be used as a tax write-off.
Sounds great, doesn't it? Before you run out and get a loan, let's look at the other side of the picture ? the cons.
Cons
1. Easy to get into further debt: With an easier load to bear and more money left over at the end of the month, it might be easy to start using your credit cards again or continuing spending habits that got you into such credit card debt in the first place.
2. Longer time to pay off: Most mortgages are the 10 to 30 year variety. This means that rather than spend a couple of years getting out of credit card debt, you will be spending the length of your mortgage getting out of debt.
3. Spend more over the long haul: Even though the interest rate is less, if you take the loan out over a 30 year period, you may end up spending more than you would have if you had kept each individual loan.
4. You can lose everything: Consolidation loans are secured loans. If you didn't pay an unsecured credit card loan, it would give you a bad rating but your home would still be secure. If you do not pay a secured loan, they will take away whatever secured the loan. In most cases, this is your home.
As you can see, consolidated loans are not for everyone. Before you make a decision, you must realistically look at the pros and cons to determine if this is the right decision for you.
Sunday, December 9, 2007
Monday, August 27, 2007
Assessing Your Debt and Debt Consolidation
When your debts and bills overwhelm your income, you may want toconsider consolidating your credit card debt.
If you have more than three credit statements, a debt consolidationservice can help you organize your bills and limit your paperwork tojust one single monthly payment.
If your money is spread too thin each month, and you are delayingpayment on bills, chances are your credit is overextended. A debtconsolidation service can often help lower your interest rates andyour minimum monthly payment.
Once creditors start calling you and demanding payment, you may havedamaged your credit history and lowered your credit score. You canrepair the damage with a debt consolidation company which can helpyou get your monthly payments back on track.
A debt consolidation service, or consolidating your debt on your ownwith a loan, can improve your credit history and help you save your credit.
If you have more than three credit statements, a debt consolidationservice can help you organize your bills and limit your paperwork tojust one single monthly payment.
If your money is spread too thin each month, and you are delayingpayment on bills, chances are your credit is overextended. A debtconsolidation service can often help lower your interest rates andyour minimum monthly payment.
Once creditors start calling you and demanding payment, you may havedamaged your credit history and lowered your credit score. You canrepair the damage with a debt consolidation company which can helpyou get your monthly payments back on track.
A debt consolidation service, or consolidating your debt on your ownwith a loan, can improve your credit history and help you save your credit.
Be Wise By Consolidating Your Credit Card Debt And Saving Money!
It is essential once you decide to consolidate your debt to evaluate if you are going to be saving money while at it. This is a critical issue because, though you may end up paying lower monthly installments, the consolidation loan may turn up to be more onerous than your current outstanding debt. Thus, unless you can’t handle your payments in another way, you should consider other alternatives.
So, unless your only option is to lower your monthly payments by extending the repayment program and coping with a higher or similar interest rate, you should try to get the best deal on your consolidation loan with the lowest interest rate available and only extend the repayment program if you need low monthly payments. If you can afford higher payments, you should do so because that way you would be saving money while at the same time shortening the time needed to be debt-free.
So, unless your only option is to lower your monthly payments by extending the repayment program and coping with a higher or similar interest rate, you should try to get the best deal on your consolidation loan with the lowest interest rate available and only extend the repayment program if you need low monthly payments. If you can afford higher payments, you should do so because that way you would be saving money while at the same time shortening the time needed to be debt-free.
It's almost impossible to live debt-free; most of us can't pay cash for our homes or our children's college educations. But too many of us let debt get out of hand.
Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That's one factor mortgage bankers consider when assessing the creditworthiness of a potential borrower.
It's far too easy to spend more than you can afford, especially when you pay by credit card. The average U.S. household with at least one credit card carries over an $8,000 balance.
Of course, avoiding debt at any cost is not smart, either, if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for upfront without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments. Three examples of good debt are buying a home, paying for college, and financing a car.
Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt, since it carries the highest interest rates.
Sometimes the decision to borrow doesn't hinge on how much cash you have, but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That's one factor mortgage bankers consider when assessing the creditworthiness of a potential borrower.
It's far too easy to spend more than you can afford, especially when you pay by credit card. The average U.S. household with at least one credit card carries over an $8,000 balance.
Of course, avoiding debt at any cost is not smart, either, if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow.
Good debt includes anything you need but can't afford to pay for upfront without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments. Three examples of good debt are buying a home, paying for college, and financing a car.
Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt, since it carries the highest interest rates.
Sometimes the decision to borrow doesn't hinge on how much cash you have, but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense.
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