Consolidate Debt: Tips for Reducing Personal Debts
More and more people are choosing to consolidate debt to lower monthly payments and reduce interest rates. Although debt consolidation is a convenient solution for reducing debts, certain aspects should be considered before engaging in this type of financial arrangement.
In order to consolidate debt, you must possess sufficient credit rating to qualify for a loan. With the current credit crisis many banks have changed lending criteria; making it nearly impossible for borrowers to obtain debt consolidation loans.
Most debt consolidation loans are home equity loans. In order to obtain this type of funding, you must have accrued equity in your house. A second mortgage is taken out using the real estate as collateral. Outstanding loans are paid off and debt is transferred to the home equity loan. The second mortgage payment should be less than the combined payments of the loans you are paying off.
Debt consolidation loans are usually repaid over a period of ten to fifteen years. Credit cards and student loans are generally repaid within three to five years. Therefore, it is imperative to calculate the actual cost of the home equity loan. Although monthly payments are lower, you will be paying interest for seven to ten additional years.
Realize home equity loans can place your property at risk for foreclosure. Since you are securing the note with your home, should you become unable to afford loan payments your lender can commence with foreclosure.
Before deciding to consolidate debt using home equity loans, take time to understand the risks involved. Using real estate to pay off credit cards and unsecured loans can be risky and expensive. Use extreme caution when traveling down this path.
Another debt consolidation option is obtaining a home equity line of credit. HELOC loans provide borrowers with a predetermined line of credit that can be accessed as needed. Adjustable interest rates are normally charged on home equity line of credit, but only when funds are withdrawn.
Some borrowers elect to engage in cash-out refinancing to consolidate debt. This type of financing requires debtors to pay off their original mortgage note and obtain a new home loan. Borrowers can obtain cash using the accrued property equity. Refinancing is typically reserved for homeowners who possess a solid history of paying their mortgage on time and have sufficient equity to borrow against.
People who do not own real estate can consolidate debt through various debt reduction programs. These might include debt settlement, credit counseling, budgeting or bankruptcy. Caution should be used when working with debt elimination companies. Many claim they can negotiate debt with creditors, but are unsuccessful in their attempts or unscrupulous in their business dealings.
Credit counselors are a good resource for locating debt consolidation options. Credit counselors are trained to review consumers’ finances, offer advice, assist in the development of debt reduction plans and creditor negotiations.
Personal bankruptcy should be the last resort. The financial fallout from bankruptcy can destroy your credit and make it nearly impossible for you to obtain credit or purchase a home for ten years.
Invest time to become educated about debt consolidation options. Review personal finances to determine where wasteful spending occurs. Develop a plan to reduce debt and place it in action. Then, enjoy the rewards of your efforts as you break free from financial bondage!
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