Cure or Continued Credit Problems?

Interest rates haven’t been this low for decades, tempting some consumers to take on additional debt to ease existing credit woes. The goal is to consolidate various higher-interest balances into one, easier-to-handle and less-costly package.

But be careful of what looks to be a quick fix.

“You’re getting symptomatic relief, not a credit cure,” says Chris Viale, general manager of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam, Mass.

This fighting-fire-with-fire approach can take several forms. There are debt-consolidation loans, balance transfers to a zero-percent credit card and home equity loans or lines of credit.

But, says Viale, 70 percent of Americans who take out a home equity loan or other type of loan to pay off credit cards end up with the same (if not higher) debt load within two years.

Viale’s statistics underscore a major problem with debt consolidation: It feeds upon the tendencies that got you in trouble in the first place. By taking on yet another creditor, you’re adding the proverbial fuel to the fire. In this case, it’s your money that’s burning.

Plus, if you’ve taken on so much debt that you’re looking for more as a solution, chances are you won’t qualify for the very low interest rates you see advertised. Those generally go to people with stellar credit ratings.

However, if you’re at the end of your credit rope or swear that this time you’ll be more disciplined, debt consolidation may be something to consider despite its risks. Here are some popular forms of debt consolidation, how they work and a look at their pros and cons.

Home equity loan or line of credit

Home equity lines or loans often are touted as a quick and easy way to get out of debt. By leveraging your residence’s value, the pitch goes, you can get money to pay off other bills and a tax break, too.

But borrowing against your house can backfire. The biggest risk: You could lose your home if you default on the loan.

“Some hardship occurs and now they have double the debt and if it’s secured by their home, they could lose it,” says Diane Giarratano, director of education at Garden State Consumer Credit Counseling in Freehold, N.J.

And while equity loan interest generally is tax deductible, it could be limited in some situations. Even when it does provide a tax break, Cambridge’s Viale says “that doesn’t mean it makes fiscal sense.”

Giarratano agrees. “Banks will tell you how much you can borrow,” she says. “That doesn’t mean you should borrow the total amount, but that’s what people do.”

Still, a home equity line of credit or loan to pay off creditors can work for some debt-burdened homeowners. Just be sure to do your homework to guarantee that the home equity dollars and cents make sense. This Bankrate calculator can help your determine whether borrowing against your home’s equity is a wise move.

Zero-percent credit card

What about people who don’t own a house? In these cases, many turn to zero-percent credit cards to reduce debt. Again, prudence and discipline are required.

Companies offer these rates as teasers — enticements for you to switch credit card vendors. Much of the time, card companies target consumers with better credit, so that may leave someone struggling with debt without this option.

Even if you do qualify for a zero-percent or similar single-digit rate, it won’t last forever. Make sure you know when it will end and what the rate is expected to jump to when it does.

The low rate also lasts only if you pay on time. One late payment and the credit card company will jack up the rate. Also look for hidden fees and charges that can increase the actual cost of credit….. read more »

5 Debt Consolidation Loan Tips

If you struggle to pay multiple credit card bills each month along with your student loan, your car loan and your mortgage, wrapping all those bills into one monthly payment may seem like a dream come true. But before you apply for a debt consolidation loan, you need to take steps to ensure that your financial plan doesn’t backfire.

Debt consolidation tips

1) Debt consolidation loan vs. home equity loan

If you own a home, you may be considering a home equity loan instead of a debt consolidation loan. While a home equity loan may offer you tax benefits since you can deduct your interest payments and will typically have a lower interest rate than debt consolidation loans, you are putting your home at risk if you are unable to make the payments. Make sure you have at least 20 percent or more in home equity before you tap into it to pay off your bills.

2) Compare interest rates

While debt consolidation loans usually have a lower interest rate than a credit card, the rate could be higher than your car loan or student loan interest rates. Be careful that the interest rate you’re quoted extends for the entire loan period also….. read more »

Credit Card Debt and Debt Consolidation Loans

One of the best solutions for credit card debt is debt consolidation – specifically the one that involves loans. However, it is important for you to possess the right requirements for you to maximize the benefits of this debt solution.

The idea is to get a loan that is big enough to cover your other debts. Once you have the amount, you can pay off your credit card debt and keep the cards so you are not tempted to use them again. Then, you will concentrate on paying off this one loan that you got.

What makes debt consolidation loans beneficial involve two factors: the single payment scheme and lower monthly contributions. Credit card debt is notorious for the high interest rate and finance charges that can grow your balance into a big amount. If you have barely enough to stick to your minimum payments, it will take you a very long time to finish paying off what you owe. Debt consolidation loans can help fix that – but only if you qualify for it.

Like any other loan, this debt solution will require you to possess a steady income. You need to show proof that you can afford to pay off the loan that you are applying for. Without it, you will not be granted the financial assistance that you need to go through this debt relief program.

The low monthly contribution that this debt relief allows to happen is due to the structured payment term and the low interest rate. For the latter to happen, you need a good credit score. This will signify that you are a low risk borrower and thus the need to protect the loan through a high interest loan is no longer necessary. If you do not have this, another way to enjoy the low interest is through a collateral. You will put on the line a valuable personal asset that the lender can take in case you default on your payments. That is their guarantee that they will get a form of payment from you….. read more »

Debt Consolidation Loan Tips

If you have multiple debts and are unable to pay them off now, a debt consolidation loan may be a very smart move. There are three primary considerations however: interest, term, and risk. Will your new loan lead to a lower overall interest rate and total interest payment? Will your term or payment period be shorter? And what risk does your new loan carry?

Interest

The biggest problem with debt is the interest you pay to carry it. Credit card debt is generally the worst by far, with interest rates often around 20%. If you have $10,000 of credit card debt at 20% and you make $250/month payments, you’ll end up paying an extra $6,617 in interest, for example. With the same figures, if you’re making 3% minimum payments instead of a $250/month fixed payment you’ll spend an extra $12,240 in interest over 25 years. Therefore, any loan you get to consolidate your debts needs to have a lower interest rate. Don’t get scammed into looking only at the monthly payment. Some dishonest loan sharks will attempt to raise your interest and increase your term so that you feel you’re getting a better deal with lower monthly payments, when in fact you’ll end up paying them more money and being in debt longer….. read more »

Student Loan Debt Consolidation Tips

Studying in the United States is very expensive nowadays with the cost of tuition and textbooks escalating day by day. With the increase of these costs, there is increased demand and need for student loan debt consolidation, both those who go to graduate school and for those studying abroad.

With the debt student loans consolidation, get a low interest rate with a flexible payback terms to meet the needs of people not working. But sometimes even these interest rates can make it difficult for you to pay your loan on time.

Two types of student loan debt consolidation

With the student loan debt consolidation, students are easy to manage their debt and find it possible to avoid debt default. This is because either helps in reducing the principal amount of your education expenses or even help in removing this amount in full. The debt consolidation loan applies to students who depends on the type of student loan you have.

There are two types of debt consolidation loan plans to choose from federal and private, If you have both types of loans, which is not entirely advisable to consolidate them into one package. This is because federal loans have government backing and are able to refinance at lower interest rates fell unlike their private loans….. read more »

Bad Credit – Debt Consolidation Loan

Some Bills.com readers who have bad credit mention unsecured loans as a means of consolidating their debt. In theory, it is possible to get an unsecured loan to consolidate debt. However, in practice, most people who want or need an unsecured loan to consolidate debt do not qualify for an unsecured loan. Why? Lenders want three things in a perfect borrower:

  • Stable income
  • Excellent credit history
  • Low debt-to-income ratio

Two items on the list, credit history and low debt-to-income ratio, trip up many people seeking a debt consolidation loan. This is a classic catch-22 situation. The potential borrower would not need a debt consolidation loan if they had excellent credit and a low debt-to-income (DTI) ratio, and a person who needs a debt consolidation loan almost always has a high DTI and marginal credit. For these reasons, a person with low credit seeking a debt consolidation loan should look for a debt consolidation program or think creatively about a loan source.

Home Equity Loan

A home equity loan is a popular type of debt consolidation loan. Tighter lending guidelines along with a significant drop in property values in many parts of the country have made this kind of secured debt consolidation loan more difficult to obtain. A cash-out refi or a HELOC requires good to excellent credit, strong DTI, and most importantly, significant equity in the home. The days of 100% financing are gone; most lenders do not offer cash-out financing above 80% of your home’s value….. read more »

Debt Consolidation Pros And Cons

Financial independence is at the core of the American Dream.

No one sets out fresh out of college with aspirations and hopes of being dead broke at the end of their life!

But the unfortunate reality is that scores of people find themselves in significant personal and household debt by the age of 30.

Fortunately, there is good news. No matter how bad your current financial situation is, there is hope. If you take the right steps today, you can still reach your financial goals and find true financial independence.

Paying Down Debt

The first major step a person must take toward gaining control of their personal finances is deciding to eliminate all personal debts. There is no secret formula to making this happen. You simply have to be willing to cut expenses, which may mean less eating out, less entertainment, and fewer shopping trips each month, and then you direct this extra cash flow toward paying down your debts….. read more »

Tips for Mortgage Refinancing

Many people discover that their credit card debt is out of control when they get their monthly bank statement. Mortgage payment, everyday spending, services and occasionally getaways or dining out can bring your balance over-the-limit fees. It’s time to consider debt consolidation to save your money – credit card balance transfer, home equity loan or mortgage refinancing.

One of the best ways to obtain debt relief is by consolidating your debts with a mortgage refinancing if the timing is right. Refinanced mortgage is a form of debt help for the borrower, who will be able to pay down the old mortgage with the money of a new loan.

The benefit of mortgage refinance is based in not only debt consolidation of other debt, but in getting a lower interest rate, lower pay off, and taking cash out of the home equity. Although every borrower may have their particular reason for applying for a new loan, all of them share the desire for debt relief by reducing their mortgages’ interests’ rates and liquidating cash from their home equity when possible.

Mortgage refinancing usually costs a couple of thousand dollars in closing cost besides the time you spend on research, application etc. Debt advice on home mortgage can easily be obtained through the mortgage lender, mortgage broker, financial institutions and Government Consumer Protection Offices….. read more »

7 Tips for Avoiding Debt Consolidation Loans

Many Americans continue to struggle with repaying debt and look to debt consolidation loans as the only option. Yet there are many other ways to reduce debt while maintaining credit and the little extras in life.

As the numbers for consumer spending continue to tick upward, many Americans are noticing their debt growing, too. American Financial Solutions offers 7 tips to help eliminate debt and keep finances from getting out of control.

1. Create a spending plan. Cover all of your normal monthly bills and expenses as well as building in a cushion for the little extras you enjoy throughout the pay period or month. Then set aside an amount for two additional items: extra debt repayment and savings….. read more »

10 Debt Consolidation Tips

Big debt with low interest is the selling point. Kick your creditors out the door with a one-time debt consolidation loan and live on Easy Street. It sounds good-too good. Debt consolidation loans are easy to sell, but hard to retire.

These loans are frequently long term and require you home for collateral. Work through these steps to make sure that you both need and want to go through a debt consolidation before you sign the application and the contract.

1) Why do want to consolidate your debt?

Most people head down the path to debt consolidation because they want smaller payments to free up cash each month. A few are looking to save money on interest costs. Fewer still consolidate debt to help them get out of debt. In reality, you need to have all three as viable goals in order to justify debt consolidation. If you do not have the last one on your list of reasons, you are probably designing a method to go deeper into debt that you cannot afford in the long run.

2) Evaluate what types of debt consolidation are available in your situation

One of three scenarios usually play out for people thinking of consolidating debt. The first is a home equity line or a second mortgage on their home. Second, a credit card or some other type of credit line is used to absorb all of the other debt.

Finally, an additional form of secured or unsecured debt is exchanged for existing debt. A family member or friend may be willing to make you a loan for this third option. Each of these choices can carry wide variations in interest rates and repayment plans. Weigh your options carefully before deciding to leap into additional debt to retire existing debt….. read more »