If youre looking to consolidate your current loans into one loan with a lower interest rate, debt consolidation may be the way to go.
If you are currently looking to consolidate your debt there are a few steps youll need to go through in order to facilitate the process. Youll need to understand your debt. To do that:
1) Make a list of your current debts. In addition to the large loans like your mortgage and car loan, make sure to include all personal loans, student loans, and credit card debt.
2) Within your list above, add columns for balance due, current interest rate, and monthly payment. This will allow you to understand the total amount of your debt.
3) Calculate the amount of money you will actually spend on each loan over the lifetime of the loan. For example, if you pay the minimum balance on your credit card each month, over 30 years (the typical length of the life of the credit card loan) you could wind up paying $40,000. Obviously, this number depends on how much you owe and how much you are paying off and if you are continuing to add to your balance.
Once you review this information, youll have a better understand of your debt and will be able to make a more informed decision as to which type of debt consolidation loan is best for your individual circumstances.
One of the more common methods of debt consolidation available is a balance transfer to a new or existing credit card. Often credit card companies look for new customers via attractive APRs on balance transfers. This is a rather reasonable type of loan to consider. Instead of paying a number of different credit card companies, you have one bill per month, usually at a significantly lower interest rate. Just make sure to review the terms of the offer. How long is this APR good for? Is it available for balance transfers or only new debt? And dont forget to talk to your existing credit card companies. They may be willing to match the terms of the balance transfer offer.
You might also consider refinancing your current mortgage or taking out a second mortgage. The obvious disadvantage to this type of loan is that you are putting your house up as collateral, and decreasing the amount of equity you have in your home. On the plus side, interest on loans secured by property is usually tax deductible.
You may also want to consider enlisting the aid of family or friends, if you are fortunate enough to have any with the financial resources to help you. As with any other loan, you should draw up the terms of the loan and put them in writing. Make sure to include a repayment schedule and the agreed upon interest rate. This will help to alleviate any future confusion.
You can also contact a non-profit service, such as American Consumer Credit Counseling. They can negotiate lower payments for you. Often you will be writing a monthly check to them to cover the loans they will have consolidated for you. If you go this route, it is imperative that you investigate the service before you agree to sign up with them.
After youve considered all the debt consolidation loans available to you, you should look at the bottom line. It is possible that your new loan will cost more over the long term. If this is the case, and you can make your current payments, it may be advisable to do so, even if the payments are higher today than they would be after debt consolidation.
Make sure to pay attention to how much the loan will cost. Will there be upfront fees, points, closing costs, recurring fees? What is the interest rate? Are there tax implications to consider? Generally, the better your credit, the less you will have to pay for a loan and the lower your interest rate will be. It might also be advisable to enlist the aid of a financial advisor in helping you determine which option is best for you.
Finally, make sure to read the loan contract thoroughly. Are all the terms what you had agreed to originally? Is the interest rate correct? Are there any additional fees you had not been advised of?
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