Debt consolidation or a consolidation loan is a process consumers can use to combine their loans and liabilities into one loan. This means that instead of paying several separate bills each month, you get a loan with a bank, credit union or other financial institution to get a payment that is smaller than the total of the prior payments.
This payment is smaller because the debt can be paid over a longer period of time, and/or the interest is lower. Another advantage is to get a fixed rate loan if some of your debts have fluctuating rates.
How do I start?
Make a list of what debts you have. Include the balance owed, the monthly payment and the interest you are paying on each account and how many payments are left for each bill. This way you will know where to start. You’ll have an idea of how much money you need and at what rate it needs to be to save you money.
Depending on how much money you need, you will be able to decide if the loan can be an unsecured loan – usually limited to $5000, or if you need above this number you will probably need a secured loan. A secured loan might include tying the loan to refinancing your house or taking a second mortgage.
Securing the loan with some collateral should allow you to get a lower interest rate than you would get with an unsecured or personal loan. You get a lower rate because the lender can take the asset from you and sell it to get their money back if you don’t default on the loan.
Now that you know what you need, pull your credit report and make sure the things that are on it are correct and that everything is yours. Then go to one of the debt consolidation sites and see what types of loans and interest rates are possible. Talk to your bank and compare what their options are.
Is consolidating my debts a good idea?
Every person’s situation is different. Go back to your list. Look at how long you have left for these loans and what the interest rate is. Loan consolidation can be very advantageous if you have several small loans with higher interest rates. For instance the balance on your credit cards runs to several thousand dollars and the interest is in double digits.
If you roll it into a home mortgage, you might be able to cut the interest rates in half. The downside is you pay that interest on the balance for fifteen or more years, depending on the term of the mortgage. There are websites out there that have calculators for figuring out the cost of debt if you owe X with Y% interest and have Z years left to pay. Figure this out for each of your debts and total that number.
Then take the new amount you need to borrow to cover all these loans, what you think your interest rate might be, and the term. If you are including this as a refinanced mortgage, the term would be the length of your mortgage. What is the total?
One of the great calculators out there is the one on www.moneycentral.msn.com. The ‘consolidate your debt time frame calculator’ can help you play with the options and make an educated decision.
What is the biggest danger for Debt Consolidation?
Getting the debt consolidation loan and using it on something other than paying off the debts you got the loan for. It is important that if you get a loan to pay off smaller loans that you actually take the money and pay off all those loans. You might be tempted to keep some of it and use it for something else. If you spend the money somewhere else, you’ll end up with the old loan payment, and a new one.
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In financial circles, the definition of debt consolidation or a consolidation loan looks like this: it’s a "strategy used by a consumer to manage their debt," or it’s a “process of combining several loans or liabilities into one loan.”
Note the words strategy and process. Strategy implies that you know what you’re trying to accomplish and are taking proactive measures to reach certain goals. Process on the other hand leaves you feeling as if you are being pushed and pulled along some giant stairwell that takes you where you really don’t want to go.
No matter what definition you use, debt consolidation means that instead of paying off several separate bills each month, you plan to consolidate your loans with a bank, credit union, or other financial institution. The reason for doing this is to get one payment that is smaller than the combined total of all the other payments.
The smaller payment occurs because the debt has a longer time to be paid, or possibly provides you with a better interest rate. You might want to consolidate your debt to secure a fixed interest rate if one or more of your smaller loans have fluctuating rates.
The first step in consolidating your debts is to know what you have. Make a list of each loan and include the overall balance, the monthly payment and the interest for the current loan. This allows you to know what your situation is now, before you make a decision on a new loan.
The new loan might be an unsecured loan, or you may be refinancing cars or other secured items and adding an amount that will allow you to pay off a few smaller loans. Unsecured loans are sometimes called signature loans, or personal loans.
Securing the loan means tying it to an asset. Debt Consolidation can be done as part of a first or second mortgage. This allows you to roll short-term debt into a home mortgage loan, either when you buy the house or later as part of a refinance package or second mortgage.
For a mortgage, the asset is your house. But again, the asset could be a car, or boat, or even savings CDs that you have at the bank giving you the loan. Another word for asset is collateral and securing a loan with this collateral is sometimes called ‘collateralization’ of the loan.
Usually securing the loan with an asset or some collateral allows you to get a lower interest rate than you would get with an unsecured loan. This is because if you fail to make your payments, the lender – either a bank or other financial institution – can take the asset from you and sell it to get their money back. Since the lender has a reduced risk of losing their money, you get a lower interest rate for your loan.
Loan consolidation can be very advantageous if you have several small loans with higher interest rates. For instance the balance on your credit cards runs to several thousand dollars and the interest is in double digits. If you roll it into a home mortgage, you might be able to cut the interest rates in half. The downside is you pay that interest on the balance for fifteen or more years, depending on the term of the mortgage.
Debt Consolidation sometimes occurs when people or businesses have credit problems. It is important that if you get a loan to pay off smaller loans that you actually take the money and pay off those loans. Many people get into trouble when they decide to do a consolidation loan and then spend the money somewhere else. This leaves them with all the old loans, and a new payment.
Referencing the definitions at the beginning of the article, debt consolidation can be a strategy, or a process. Do your research and ask questions. Read all the information on the company and consolidation loan you’re considering, and make an informed decision, then you can be proactive and strategize your next move. Or you can scramble, let the ‘process’ drive your moves and go with the first thing that comes along.
Which definition do you want your debt consolidation to be? Is this going to be a strategy or a process?
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Simply put, Debt Settlement is a way for you to negotiate with your creditors in the hopes of getting them to accept a balance due that is less than the full amount of what you owe them.
Also called debt arbitration or debt negotiation, this approach allows you to reduce your overall debt by agreeing to a reduced balance and then immediately paying this amount in full or setting up a reduces payment plan.
What you need to realize is that the only debts that can be negotiated are credit card debts and sometimes unsecured personal loans. Creditors don’t negotiated new balances on secured loans like auto financing or mortgages. They might re-negotiate the loan to a new term or interest, but they won’t take off some of the debt. Neither can you use debt settlement on student loans. Student loan providers will often negotiate a lower payment or no payment for a time, but interest continues to accrue and they won’t settle the debt for less than you owe. Neither can debts like tax-liens or domestic judgments be settled in this manner.
If you are up to date on your payments and continue to pay the minimum monthly payments, creditors won’t be willing to negotiate a reduced balance. The downside to this is that if you stop paying them with the idea of negotiating a settlement, the balance grows with added late fees, penalties and building interest.
Debt Settlement Negotiation
You can negotiate a settlement for yourself. There are several websites that provide step by step instructions on how to do this, even providing a script of what to say to creditors. You can hire a lawyer to act for you, or use a debt settlement company.
Lawyers will either charge you an hourly rate to negotiate the settlements, or some may have a set fee for this type of service. Debt settlement companies either take a monthly fee for their service or charge a larger upfront fee to negotiate with your debtors. There is expert advice available that suggests you look for a settlement company that will take their payment only if they reach a settlement with your creditor, and then charge you twenty percent or less of the amount they saved you.
Debt Settlement vs. Bankruptcy
If your circumstances have changed and you are considering bankruptcy, you may want to look into Debt Settlement. You can avoid court-mandated control of your funds, payments and dispersal of income, while still reducing your overall debt—sometimes by more than 50%. You wipe the slate clean, or get payments you can handle. Your creditors or lenders get some of their money, and a renewed sense that you intend to payback what you can. By agreeing to a reduced amount, they are hoping you won’t file for bankruptcy. If you file for bankruptcy, the creditors might not get any of the money you owe them.
Debt Settlement and Your Credit Score
In order to get your creditors to settle, you have to already have late or unpaid, payments. So your credit score has been damaged just from this first step. Reaching a settlement is reflected in your credit report and further damages your credit score, but as you settle your accounts the score starts to improve.
There is a lot of advice available on how to improve your credit score. Once you’ve settled your debts, actively focus on following the credit repair guidelines for the things you can control. It may take a little time, but knowing what helps and striving to follow those tips will be worth it.
There are even settlement companies that have credit repair programs as part of their settlement services. Credit repair might require an additional fee. There is something to be said about having someone guiding you during this time, it might help you stay focused and out of more debt.
Your credit report is used for more than just lending purposes so whatever you can do to improve your rating is worth considering. The report might be used by insurance companies to fix a premium price and if you are job-hunting, prospective employers sometimes use the report to verify the character of employees.
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