debt consolidation

Contents

debt consolidation

Англо-русский экономический словарь .

Смотреть что такое "debt consolidation" в других словарях:

debt consolidation — UK US noun [U] FINANCE ► a method used for managing debt, in which you take out a single new loan and use it to pay back several of your other debts: »The OFT said that the majority of debt consolidation loans took the form of a second mortgage … Financial and business terms

debt consolidation — n. The practice of combining debts from various sources into one account. The Essential Law Dictionary. Sphinx Publishing, An imprint of Sourcebooks, Inc. Amy Hackney Blackwell. 2008 … Law dictionary

Debt consolidation — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Emp … Wikipedia

Debt Consolidation — The act of combining several loans or liabilities into one loan. Debt consolidation involves taking out a new loan to pay off a number of other debts. Most people who consolidate their debt usually do it to attain a lower interest rate, or the… … Investment dictionary

Debt relief — is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations. From antiquity through the 19th century, it refers to domestic debts, in particular agricultural debts and… … Wikipedia

Debt settlement — Debt settlement, also known as debt arbitration, debt negotiation or credit settlement, is an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full.[1] Debt settlement is… … Wikipedia

Consolidation — may refer to: Consolidation (business), the mergers or acquisitions of many smaller companies into much larger ones Consolidation (soil), a geological process whereby a soil decreases in volume Consolidation (media), consolidation of United… … Wikipedia

Consolidation — The combining of two or more firms to form an entirely new entity. The New York Times Financial Glossary * * * consolidation con‧sol‧i‧da‧tion [kənˌsɒlˈdeɪʆn ǁ ˌsɑːl ] noun [countable, uncountable] 1. ECONOMICS when companies combine in… … Financial and business terms

consolidation — The combining of two or more firms to form an entirely new entity. Bloomberg Financial Dictionary A procedure whereby a number of small consignments are loaded together to form a single, larger consignment. This must be carried out as part of a… … Financial and business terms

debt — A sum of money due by certain and express agreement. A specified sum of money owing to one person from another, including not only obligation of debtor to pay but right of creditor to receive and enforce payment. State v. Ducey, 25 Ohio App.2d 50 … Black's law dictionary

Answer a couple of basic questions about your debt. Based on your location, debt amount and type of debt, we can recommend a path.

Your certified debt resolution specialist will show you how to pay off your debt and give you the motivation to get there.

Follow the payment plan you agree to with your certified specialist and you are on the way to being debt free in less time and for less money than if you did it on your own.

Questions? Call 888-997-5113

Do you need help with your unsecured debt? Then you've probably noticed the countless ads saying that your payments can be cut in half or more by working with a debt consolidation company.

First, you should understand that what is commonly referred to as 'debt consolidation' is actually 3 different products - debt management plans, debt settlement and debt consolidation loans.

Understand Your Debt Consolidation Options

The product that will work best for you depends on a number of factors starting with the amount of debt you have as well as your ability to manage it. Each product has its own set of terms, eligibility requirements and repercussions which can affect your credit both positively and negatively.

Make sure you understand the differences between the products and choose the right product for your situation. Many companies only provide one or two debt consolidation options and will sell you their product even if it is not right for you.

Researching your credit counseling agency

Many consumers have apprehensions about using the services of a credit counseling agency and with good reason. There are companies that call themselves credit counselors but promise more than they can produce. Reputable credit counseling agencies help people get out of debt every day by being up front about their capabilities and following best practices.

As with other service-related industries, you just have to do a little research to make sure you're working with the right people. The internet is a great place to start checking out the credentials of credit counseling agencies.

  1. Do research on your credit counseling agency at your local BBB.
  2. Google "'Credit Counseling Company' review" and 'Credit Counseling Company' feedback" to gauge their customer satisfaction.
  3. Make sure they explain all of your options for getting out of debt. One-size-fits-all companies are common and can be dangerous.

Reasons to Consider Getting Professional Debt Help

There are many different reasons that can lead to a drop in income or an increase in debt, and you may be caught completely unprepared. Common causes include illness or injury, divorce, losing your job, birth of a baby or retirement.

If cutting your budget hasn't done enough to ease the burden of debt repayment then you should begin to consider your other options. For those that have already fallen behind on making payments, the longer you wait the more your debt will mount as additional expenses like late fees are added on.

If credit card debt is causing you problems, debt consolidation could be the solution. Find out how to lower interest rates and reduce monthly payments while eliminating your debt.

Debt consolidation is combining several unsecured debts — credit cards, medical bills, personal loans, payday loans, etc. — into one bill. Instead of having to write checks to 5–10 creditors every month, you consolidate credit bills into one payment, and write one check. This helps eliminate mistakes that result in finances charges like late payments.

Note: Debt consolidation is commonly referred to as credit consolidation. There are three major types of debt consolidation: Debt Management Plans, Debt Consolidation Loans and Debt Settlement. These are not quick fixes, but rather long-term financial strategies to help you get out of debt. When done correctly, debt consolidation can:

  • Lower your interest rates
  • Lower your monthly payments
  • Protect your credit score
  • Help you get out of debt faster

Making the decision to consolidate debt is the first step. Ignoring your debts will not make them go away; it will make your problems worse. The sooner you get help with your credit card debt and make a plan to repay, negotiate, or consolidate them, the sooner you’ll be living a life free of debt.

A debt management plan or debt settlement should be your top options for consolidating your credit card debt, but alternatives include obtaining a debt consolidation loan, borrowing from your retirement funds or the equity in your home, and consolidating your student loans. While you can't consolidate federal student loans with other debts, including private school loans, lending institutions can consolidate private education loans with other sources of debt.

Financial advisors tend to lean away from turning unsecured debt into secured debt, so utilizing home equity is often not considered the best option. You risk losing some or all of the assets you used to secure the debt. Similarly, you should explore all other options before choosing to withdraw money from tax-free accounts you set up for your retirement.

Debt consolidation works by combining multiple debts into one account and making a single, on-time monthly payment until all the debt is eliminated. Debt management plans, debt consolidation loans and debt settlement programs are the primary ways to consolidate debt, but there are several other options available (credit card balance transfers, home equity loans, personal loans, online lenders, etc.), depending on how desperate your situation is.

What Is The Best Way to Consolidate Debt?

How much money you owe and your available resources dictate the best option for consolidating debt.

If your credit card debt is over $5,000, a debt management plan or debt consolidation loan are very good choices. Both plans are based on reducing interest rate paid on the debt, thus making it easier to afford monthly payments. The difference is that there is no loan involved in a debt management plan.

If your credit card debt has ballooned to an unmanageable figure - a number so high that you can barely afford the minimum monthly payments - debt management and a debt consolidation loan are still in the mix, but it would be wise to add debt settlement. If you own a home, a home equity loan also is an option.

If your credit card balance is under $5,000 - and you're committed to pushing it down to zero - a zero-percent interest credit card balance transfer would be another choice. However, those cards usually go to customers with very high credit scores, charge a 3%-5% balance transfer fee and have an introductory period lasting 12-18 months before regular interest rates apply.

Most financial experts agree that a Debt Management Plan (DMP) is the preferred method of debt consolidation. The most-recommended DMPs are run by non-profit organizations. They start with a credit counseling session to help determine how much money you can afford to pay creditors each month. The non-profit agency can help you get a lower interest rate from creditors and reduce or waive late fees to help make your monthly payment affordable. You send one payment to the agency running the DMP and they split it among all your creditors. Utilizing a debt management plan could affect your credit score. However, at the end of the 3-to-5 year process, you should be debt free, which definitely improves your score.

A Debt Consolidation Loan (DCL) allows you to make one payment to one lender in place of multiple payments to multiple creditors. A debt consolidation loan should have a fixed interest rate that is lower than what you were paying, which reduce your monthly payments and make it easier to repay the debts. There are several types of DCLs, including home equity loans, zero-interest balance transfers on credit cards, personal loans, and consolidating student loans. It is a popular way to bundle a variety of bills into one payment that makes it easier to track your finances. There are some drawbacks — you could face a longer repayment period before you finish paying off the debt — but it’s definitely worth investigating.

How to Get the Best Consolidation Loan

Credit unions typically offer the best rates for debt consolidation loans because they are nonprofit organizations and are owned by their members.

If you have a good relationship with your local bank, that is another choice, but banks are for-profit companies who rely heavily on credit scores to set their interest rates. At the very least, you should compare their rates to credit unions before making a decision.

If you have bad credit and aren't successful with credit unions or banks, online lenders could be a better place to borrow. Many online lenders are flexible with their qualifications as long as you are willing to pay a higher interest rate.

The key is to know how to consolidate your bills. Start by listing each of the debts you intend to consolidate - credit card, phone, medical bills, utilities, etc. - and what the monthly payment and interest rates are on those bills. It also helps to know your credit score.

Once you have this information, make sure to compare lender's rates, fees and payoff period before making a decision. A consolidation loan should reduce your interest rate, lower your monthly payment, and give you a practical way to eliminate debt.

How to Consolidate Credit Card Debt on Your Own

If you have a very good credit score (700 or above), the best way to consolidate credit card debt is to apply for a 0% interest balance transfer credit card. The 0% interest is an introductory rate that usually lasts for 6–18 months. All payments made during that time will go toward reducing your balance. When the introductory rate ends, interest rates jump to 13–27% on the remaining balance. Be aware, however, that balance transfer cards often charge a transfer fee (usually 3%), and some even have annual fees.

Another DIY way to consolidate your credit card debt would be to stop using all your cards and pay using cash instead. This can allow you to set aside a portion of your income each month to pay down balances for each card, one at a time. When you have paid off all the cards, choose one and be responsible with how you use it.

Bill consolidation is an option to eliminate debt by combining all your bills and paying them off with one loan. With bill consolidation, you make only one monthly payment — a good idea for when you have five, or maybe even 10 separate payments for credit cards, utilities, phone service, etc. If you consolidate all bills into one, the single payment should be at a lower interest rate and reduced monthly payment. Any savings could be used to start an emergency fund to help prevent a future financial crisis.

How Can I Consolidate My Bills?

Debt and bill consolidation takes patience, persistence and some organizational skills. You must start by gathering all your bills for things like medical, credit card, utilities, cell phones. Add the total amount owed on the unsecured debt. The next step is to determine how much you can afford to pay on a monthly basis, while still having enough to pay basics such as rent, food and transportation.

When you have that number, decide whether a personal loan, debt management program or debt settlement gives you the best chance to eliminate the debt. Understand that this process normally takes between three to five years. There are no easy fixes with debt consolidation.

Should You Consider Debt Consolidation?

Debt consolidation is an appealing way to simplify your bill paying responsibilities and eliminate debt, but there also is a risk that things could get worse if you don't choose the appropriate method and stay committed to the process.

The three major methods of debt consolidation - debt management, a debt consolidation loan and debt settlement - each require time to complete and a behavior change that makes paying off debt more important than accumulating more of it.

For example, a debt management program can dramatically reduce interest rates you pay on credit card debt and eliminate it in 3-5 years. However, if you fall behind on the expected monthly payments, the creditors who granted those major concessions, can revoke them immediately and you are in trouble again.

If you go with a secured debt consolidation loan using your home or car as collateral, the lender should offer an interest rate considerably better than what you're paying on credit card debt. But again, failure to make on-time payments could mean losing the home or car, which obviously makes you worse off than before.

If you decide to use debt settlement, you might reduce your debt by as much as 50%, but your credit score will take a severe hit that will last seven years. That could make it difficult to get a loan for a car or home in that time.

For debt consolidation to work, you must calculate how many payments it will take to eliminate the debt and how much interest is included in those payments. Compare that number to what you would pay under your current plan.

If you are not really committed to making on-time payments and changing the habits that got you into financial trouble, the cost and time for debt consolidation may make the situation worse.

How does a debt management program compare with a debt consolidation loan?

The major difference is you do not take out a loan for a debt management program. Both are set up to pay off debts in a 3-to-5 year time frame. A debt management program is designed to eliminate debt by educating the consumer to change their spending habits and working with creditors to reduce the interest rate and fees associated with the debt. In a debt consolidation loan, the consumer borrows enough money from a bank or credit union to pay off unsecured debts. The consumer must repay that loan and whatever fees are associated with it.

What is debt consolidation refinancing?

It means including other debts in a refinancing of your home. If you have $10,000 in credit card debt and owe $90,000 on your home, you would refinance the home for $100,000 and use $10,000 of that money to do a one-time payoff of your credit card debt. This is only a valuable if you have equity in your home (market value is higher than mortgage balance) and you receive a lower interest rate and monthly payment on your new mortgage.

What type of loans can I consolidate?

Any unsecured debt, which includes credit cards, medical bills or student loans.

Any unsecured debt, which includes credit cards, medical bills or student loans.

Depending on the amount owed, the best consolidation loans are credit card balance transfers, personal loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for personal loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not risking assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.

What Does Debt Consolidation Do Your Credit?

In most cases, your credit score will go down with debt consolidation, but how long it stays down is really up to you. The two major factors are a) which debt consolidation program you use; and b) how committed are you to making on-time payments?

If you choose a debt management program, for example, your credit score will go down for a short period of time because you are asked to stop using credit cards. However, if you make on-time payments in a DMP, your score will recover, and probably improve, in six months.

If you choose a debt consolidation loan, your poor payment history already has dinged your credit score, but paying off all those debts with a new loan, should improve your score immediately. Again, making on-time payments on the loan will continue to improve your score over time.

Debt settlement is a no-win choice from the credit score standpoint. You score will suffer immediately because debt settlement companies request that you send payments to them and not to your creditors. That's a big problem. So is the fact that a debt settlement stays on your credit report as a negative consequence for seven years.

What are the best loans for debt consolidation?

Depending on the amount owed, the best consolidation loans are credit card balance transfers, personal loans, home equity loans and an unsecured debt consolidation loan. A good-to-excellent credit score is needed for credit card balance transfers. Peer-to-peer online lending has become a good outlet for personal loans. A home equity loan is a secured loan, which means better interest rates, but you are in danger of losing your home if you miss payments. An unsecured debt consolidation loan means not risking assets, but you will pay a higher interest rate and possibly receive a shorter repayment period.

When is debt consolidation the right option?

When the monthly payment and interest rate on the consolidation loan are lower than the what you were paying every month and the payoff for eliminating debt comes within five years.

A debt consolidation loan only works if you are able to reduce the interest rate and monthly payment you make on your bills and change your spending habits. The loan won’t work if you continue spending freely, especially with credit cards.

If you are overwhelmed with unsecured debt (e.g. credit card bills, personal loans, accounts in collection), and can’t keep up with the high interest rates and payment penalties that normally accompany those obligations, debt consolidation is a viable debt relief option. It allows you to focus on making one monthly payment, ideally at a lower interest rate. However, you need to be highly-motivated to eliminate debt and disciplined enough to stay on a program that could take 3–5 years before you are debt-free.

How do I consolidate debt and pay it off?

The first step is to list the amount owed on your monthly unsecured bills. Add the bills and determine how much you can afford to pay each month on them. Your goal should be to eliminate debt in a 3-to-5 year window. Reach out to a lender and ask what their payment terms – interest rate, monthly payment and number of years to pay it off – would be for a debt consolidation loan. Compare the two costs and make a choice you are comfortable with.

It can be if you don’t change the habits that caused your debt. If you continue to overspend with credit cards or take out more loans you can’t afford, rolling them into a debt consolidation loan will not help.

Are debt consolidation loans taxable?

The IRS does not tax a debt consolidation loan. More importantly, it does not allow you to deduct interest on a debt consolidation loan unless you put up collateral, such as a house or car.

Who qualifies for debt consolidation loans?

Anyone with a good credit score could qualify for a debt consolidation loan. If you do not have a good credit score, the interest rate charged and fees associated with the loan, could make it cost more than paying off the debt on your own.

Does debt consolidation work on a limited income?

Debt consolidation loans are difficult for people on a limited income. You will need a good credit score and sufficient monthly income to convince a lender that you can afford payments on the loan. A better choice might be to consult a nonprofit credit counselor and see if you are better served with a debt management program.

What do debt consolidation companies do?

Debt consolidation is a term applied to several branches of debt relief. Some companies offer credit counseling and debt management programs. Other debt consolidation companies do debt settlement. Banks and credit unions do debt consolidation loans. Each has benefits/drawbacks, depending on the specifics of your situation.

Which debt consolidation plan is right for me?

There are so many choices available that it is impossible to single out one. The Federal Trade Commission recommends contacting a non-profit credit counseling agency to determine which debt consolidation plan best suits your needs. The credit counselors educate consumers about debt and offer options to eliminate it. Credit counselors are available for over-the-phone or in-person interviews, and their service is usually free.

Can I consolidate my debt without a loan?

Yes. A debt management program (DMP) is designed to eliminate debt without the consumer taking on a loan. A credit counseling agency takes a look at your monthly income and works with creditors to lower interest rates and possibly eliminate some fees. The two sides agree on a payment plan that fits your budget. This is not a quick fix. DMPs normally take 3-5 years, but by the end, you eliminate debt without taking on another loan.

Do lenders perceive debt consolidation negatively?

Most lenders see debt consolidation as a way to pay off obligations. The alternative is bankruptcy, in which case the unsecured debts go unpaid and the secured debts (home or auto) have to be foreclosed or repossessed. Lenders don’t like either of those choices. You may see some negative impact early in a debt consolidation program, but if you make steady, on-time payments, your credit history, credit score and appeal to lenders will all increase over time.

Debt Consolidation vs. Debt Settlement

These two repayment methods are often confused with each other, but they are vastly different.

Debt settlement companies promise to negotiate a lump-sum payment with each one of your creditors for less than what you actually owe. While this sounds ideal, there are drawbacks. Many creditors refuse to deal with debt settlement companies and debt settlements have a huge negative impact on your credit score.

Debt consolidation means taking out a single loan to pay off several unsecured debts. You make one payment to the lender each month, instead of multiple payments to multiple lenders. Debt consolidation has a positive impact on your credit score as long as you don’t miss any payments.

Debt settlement companies, on the other hand, ask clients to stop paying creditors and instead send a monthly check to the settlement company that is deposited in an escrow account. When the account reaches a specific dollar goal — this sometimes takes as long as 36 months – the settlement company steps in and makes its offer to the creditor. The creditors are not bound to accept the offer. Late fees and interest payments also accumulate during this time, making the amount owed much larger.

If you choose to use a debt settlement company, you should not pay any fees until the debt has been settled. Be sure they put in writing how much you pay in fees and how long the process will take. Remember that creditors can refuse to deal with settlement companies.

If you choose a debt consolidation company, be sure to get their fees and interest charges in writing.

Will debt consolidation lower your monthly payment or save money on interest? Enter the terms on a debt consolidation loan, then enter your current terms for each individual debt. The debt consolidation calculator will calculate the monthly payment and total interest for your debts with and without a debt consolidation loan.

Debt Consolidation Loans up to $100,000

Debt Consolidation Loans up to $100,000

  • Apply right now starting below
  • Know if you’re approved within minutes
  • Receive money within days
  • Consolidate bills into single payment

Options for Debt Consolidation

You have several options when it comes Debt Consolidation. Make sure you know which one is perfect for you.

Knowing the right things to consider when finding the right Debt Consolidation Lender is important.

We have some helpful reminders for those who are considering debt consolidation.

We’re providing you with the steps you need to take in order to start the Debt Consolidation process.

Choosing the Best Debt Consolidation Loans

To create the best list of Debt Consolidation partners for you, we’ve taken the following factors into account:

Before anything else, you first need to need to know if you qualify for the loan. Most lenders have a minimum FICO score – this represents their risk appetite. Even if you find what you believe to be the best company to get a debt consolidation loan from, you will have to look for other options if you do not meet their requirements. Therefore, if you have a relatively low FICO score, be realistic and expect higher APRs. On the other end, if you have an excellent FICO score, your options will be a lot broader.

Annual percentage rates (APR) and monthly payments

If you are looking at estimated APR and monthly payments, you should already have narrowed down the list of potential lenders on where you qualify. Of course, you want to get the best deal out there. However, understand that this is limited by certain factors, largely by your FICO score. What you will have now is a range of your potential interest rates you can accrue based on the information you gathered. Assuming you have the same loan term, the higher the interest rate is, the higher your monthly payments will be.

Aside from interest, lending institutions earn money through various fees. There are different types of fees that a lender can impose on clients, but the most common one is a prepayment fee. Your best debt consolidation loans will not come with fees unless they are very minimal. Know the fees associated with your loan. Otherwise you might be surprised when your bill comes.

If your credit rating is impeccable and you have found the perfect debt consolidation loan, you may find their payment process is indirect and very democratic. Is this still a viable option? You should always consider the accessibility and convenience of your lender. There are other concerns in your life besides settling your debt. If your chosen debt consolidation loan becomes a burden instead of making your life easier, you are better off with another creditor.

Lastly, assuming that you are no expert when it comes to how these things are handled, there must be qualified and competent customer representatives to bridge the knowledge gap for you. Even if you feel you are comfortable with a lender, you still must be certain that your concerns are addressed accurately in a timely manner. Especially when it comes to fees, there must be clear communication between the two parties. Without that, you might unknowingly hold wrong expectations and get very frustrated later on.

The decision must not be on your financial concerns alone. In the end, the loan is just as good as where you source it. Your choice must be a balance of all these factors, with some factors weighing more heavily than the others depending on your priorities.

Debt Consolidation with Personal Loans

Many individuals accumulate debt with various organizations. This can include things like student loans, credit cards, business loans, mortgages, and many other lending products.

One of the best ways to simplify this complex web of bills is with a debt consolidation loan. A debt consolidation loan is when you are given a loan to pay off other debts. The result is that your bills are consolidated into one place so you don’t have to worry about tracking multiple different payments.

You pay a fixed payment to your lender for a period of two to five years on average. Most consolidation loans are offered at a fixed interest rate, which gives borrowers the stability and predictability they might lack in their current financial arrangements.

Are you a good candidate for Debt Consolidation?

You might be a good candidate for a debt consolidation loan if:

  • You can repay your consolidation loan without accruing additional debt.
  • You have the right credit to obtain a loan at a better interest rate than your current debt.
  • You are having a hard time keeping up with multiple different payment schedules.

However, as with all financial products, there are a few things you should pay attention to:

  • Make sure you are aware of the fee the consolidation lender will charge
  • Understand what support you have access to, for example: will the lender pay your creditors directly?
  • Check if there is an advantage to having a co-signer on your loan.

Consolidation Options: Loans vs. Credit Cards

With the right credit, you can get a card that has an introductory 0% interest period. Transferring your current balances to this new card can save you money.

Something to consider, though, is that the introductory rate will eventually expire. If you haven’t paid off the balance by that point you could be in for a surprise when the bill comes due. The interest rate on credit cards is almost always higher than the interest rate on a personal loan, so if something comes up and you can’t pay off the balance on time you’ll face a large expense.

There are some distinct advantages to personal loans when compared to credit cards for debt consolidation.

The first advantages have to do with the structure of a personal loan. The fixed payments provide predictability on when you will be done paying your loan, and the interest rates are usually much lower for personal debt consolidation loans than they are for credit cards. In fact, because loans are issued through the banks, there are limits on how high of an interest rate they can have. For example, federal credit unions are typically limited to 18% per annum.

Another advantage is the way that the debt is treated on your credit report. Credit cards appear as something called revolving debt, which has a greater impact on your score than installment debt, which is how a loan is categorized. This has to do with the fact that credit cards have a credit limit, and using too much of your credit limit can negatively impact your score. These factors don’t apply to installment credit.

There are a number of ways that you can get personal debt consolidation loan, but one of the most common is to use online services to compare different lenders. Each lender has different policies and procedures, so it is important to understand how to compare different personal debt consolidation loan lenders.

Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually with more favorable pay-off terms: a lower interest rate, lower monthly payment or both. Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.

There are several ways consumers can lump debts into a single payment. One is to consolidate all their credit card payments onto one new credit card – which can be a good idea if the card charges little or no interest for a period of time – or utilize an existing credit card's balance transfer feature (especially if it's offering a special promotion on the transaction). Home equity loans or home equity lines of credit are another form of consolidation sought by some people, as the interest on this type of loan is deductible for borrowers taxpayers who itemize their deductions. There are also several consolidation options available from the federal government for those with student loans.

BREAKING DOWN 'Debt Consolidation'

Theoretically, debt consolidation is any use of one form of financing to pay off other debts. However, there are specific instruments called debt consolidation loans, offered by creditors as part of a plan to borrowers who have difficulty managing the number or size of their outstanding debts. Creditors are willing to do this for several reasons – one of them being that it maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions, such as banks and credit unions; there are also specialized debt-consolidation service companies.

There are two broad types of debt consolidation loans: secured and unsecured. Secured loans are backed by an asset of the borrower’s, such as a house or a car, that works as collateral for the loan. More traditional, unsecured debt consolidation loans, which are not backed by assets, can be more difficult to obtain. They also tend to have higher interest rates and lower qualifying amounts. Even so, the interest rates are still typically less than the rates on credit cards. Also, the interest rate is fixed.

“Typically, the loan has to be paid off in three to five years,” says Harrine Freeman, CEO and owner of H.E. Freeman Enterprises, a credit repair and credit-counseling service in Bethesda, Md., and author of “How to Get Out of Debt.”

These types of loans don’t erase the debt; they simply transfer all your debts to a different lender or type of loan. (In circumstances where you need actual debt relief or don't qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation. Debt settlement aims to reduce your obligations rather than just reducing the number of creditors. Individuals usually work with a debt-relief organization or credit-counseling service. These organizations do not make actual loans; instead, they try to renegotiate the borrower’s current debts with creditors.)

Advantages of Debt Consolidation Loans

Freeman says that debt consolidation loans are most helpful for those who have multiple debts, owe $10,000 or more, are receiving frequent calls or letters from collection agencies, have accounts with high interest rates or monthly payments, are having difficulty making payments or are unable to negotiate lower interest rates on loans. Once in place, a debt consolidation plan will stop the collection agencies from calling (assuming the loans they're calling about have been paid off).

There may be a tax break, too. The Internal Revenue Service (IRS) does not allow you to deduct interest on any unsecured debt consolidation loans. If your consolidation loan is secured with an asset, however, you may qualify for a tax deduction. Debt consolidation loan interest payments are most often tax deductible when home equity is involved.

A consolidation loan may also be kind to your credit score down the road. “If the principal is paid down faster [than it would have been without the loan], the balance is paid off sooner, which helps to boost your credit score,” says Freeman.

For example, say an individual with three credit cards and a total of $20,000 owing at a 22.99% annual rate compounded monthly needs to pay $1047.37 a month for 24 months to bring the balances to zero. This works out to $5136.88 being paid in interest alone. If the same individual were to consolidate those credit cards into a lower-interest loan at an 11% annual rate compounded monthly, he or she would need to pay $932.16 a month for 24 months to bring the balance to zero. This works out to $2,371.84 being paid in interest. The monthly savings is $115.21, and over the life of the loan the amount of savings is $2,765.04.

Even if the monthly payment stays the same, you can still come out ahead by streamlining your loans. Say that you currently have three credit cards that charge a 28% APR; they are maxed out at $5,000 each and you're spending $250 a month on each card's minimum payment. If you were to pay off each credit card separately, you would be spending $750 per month for 28 months and you would end up paying a total of around $5,441.73 in interest. However, if you transfer the balances of those three cards into one consolidated loan at a more reasonable 12% interest rate and you continue to repay the loan with the same $750 a month, you'll pay roughly one-third of the interest ($1,820.22), and you will be able to retire your loan five months earlier. This amounts to a total savings of $7,371.52 ($3,750 for payments and $3,621.52 in interest).

1 Star2 Stars3 Stars4 Stars5 Stars (7 оценок, среднее: 5.00 из 5)
Loading...
Like this post? Please share to your friends:
Leave a Reply

− 3 = 1

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!:

map