People drowning in debt are often desperate for some help. In the absence of a healthy increase in income, the amount of the regular monthly payment must be decreased. Debt consolidation companies can help accomplish this so that people drowning in too much debt can finally get ahead.
What is a Debt Consolidation Program?
A debt consolidation program is basically a larger loan that is issued to pay off all the smaller loans. Because more money is being borrowed on one loan, the payment payback period will typically be stretched out over a longer period of time. In addition to lowering the payments due to a longer payback, you may also be able to get a lower interest rate. If you choose to consolidate your debt using a home equity loan the interest will be tax-deductible, creating an additional savings for you.
The Downfalls of Debt Consolidation Programs
It’s easy to forget that the debt is not actually gone; it’s merely shifted from one lender to another. The biggest pitfall of debt consolidation programs is that people will fall into the trap of using the credit cards again, creating even more debt and an even bigger problem. Another problem with debt consolidation is that you can actually wind up paying back more interest; due to that convenient extended payback period. If you use a home equity loan and wind up defaulting on that loan, you could potentially lose your house.
Finding the Best Debt Consolidation Program
Credit Unions are one of the best places to go for debt consolidation programs. If you have a relationship with a credit union, they can often provide you with the best terms and rates. If you aren’t already a member of a credit union, you might want to consider joining one. The military, teachers, firefighters, government workers and many other groups of people have access to credit unions.
Banks that you don’t already bank with can also be a great option. Just like cable companies and phone companies will offer special promotions for new customers, banks may also offer you a sweeter deal in their efforts to win your business.
Watch the mail for flyers. You may receive something from a lending institution wanting to help you with your debt consolidation needs. When considering these options, read the terms carefully. You don’t want to wind up paying extra hidden fees or higher interest than necessary.
Your current bank can also be a good source for debt consolidation loans. Contact the bank you have your vehicle or home financed through. In addition to your credit report, they will also have your payment history with them to take into account. If you have a long-standing relationship with them, it can help you get the loan you need.
Once you have the information on debt consolidation programs from one business or bank, call around to some others. With that information in hand, you can gauge what kind of deal you are being offered from other places.
Things to Keep in Mind
Debt Consolidation loans are just that: Loans. And if part of the problem with your debt is that you are behind on payments, then you may find that you don’t qualify for one of these loans. Or, if you do qualify, you are charged extremely high interest. As mentioned before, watch the terms. If your current interest rate is only 14%, and the debt consolidation will be at 22% interest, then it’s not a smart move.
Balance transfers are another option for debt consolidation. Maybe you owe $10,000 on three different cards. Here this one card offers you the chance to pay off all the others, transferring the balances over to the one card. However, you must read the fine print. Many companies charge fees for transferring the balances, as much as $500 per balance! And, while the introductory rate might be very enticing, you need to check what that rate will increase to. Again, transferring the money doesn’t make sense if you will wind up ultimately increasing the interest rate you are paying.
Home equity loans can be the best bet for consolidating your debt. These loans are easier to get because they are secured. The payback period can be as much as twenty years, so you are sure to lower the payments. The interest rates are usually lower because the debt is secured by your house. There are two pitfalls to watch if you choose this option. The first is that you will suddenly have credit available to you again. Making the mistake of continuing to charge the driving up the balances again can leave you in a worse position than ever before. While credit card debts can be discharged in a bankruptcy, your home equity loan will be much harder to get rid of if you have to file bankruptcy. And if you are unable to pay that loan, you can easily wind up losing your house.
Regardless of which debt consolidation program you choose, be sure that you read the fine print. Understand any hidden fees, what the interest rate will be, and what the new loan will wind up costing you when it’s all done. Finally, regardless of which option you choose, make sure that you cut up those credit cards. Don’t give in to the temptation to charge on them; or you can wind up in a truly dire position.
