Consolidate Debt Loans

Debt Consolidation - Considering Your Options

Once you decide to consolidate debt, there are typically several loan options available to you. It is extremely important that you carefully consider each one of these options. Taking on a consolidation loan is not a small decision nor one to be taken lightly - even if it means relieving yourself of a larger financial burden. The last thing you need when taking on a consolidation loan is to saddle yourself - and your family - with a larger monthly payment than you can afford. Even though one payment per month seems much more preferable to many separate payments, over time that one payment has the potential to become just as much a burden as all the former ones combined.

 

There are three ways to lower the monthly payments on debt consolidation loans: automatically qualify for a lower interest rate, put up collateral (e.g. house, car, boat, motorcycle, etc.) to reduce the risk to the lender and receive a lower rate, or stretch out the term of the loan up to 15 years and exrtending out as far as 30.

Obviously, if you qualify for a lower rate coming out of the gate you are in good shape. This could occur if your overall credit history - and credit scores - do not fall in what lenders would consider the high risk catagory. Most people who apply for a debt consolidation loan, however, are doing so because they already suffer from a very risky credit score due to noone's fault but their own.

If you are unable - like most people -to qualify up front for the lower rate, you may then consider the options of collateral or extended payments to lower your monthly payment. Of course, there is always the option of simply accepting the higher payment if it is at all affordable - and if it benefits the initial reason for your consolidation. Todd Mark, spokesman for Consumer Credit Counseling Service of Greater Atlanta advises, " look at what the consolidation will cost you for the total life of the loan, not just the monthly payment. And tread carefully. Consolidation is so dangerous, especially for the typical consumer. After consolidation, they get a false sense of relief. So often the worst cases we've seen are people who have consolidated into their mortgages."

Extending the life of the loan may result in a lower payment, but this lower payment becomes a permanent part of your life. The longer you have the payment, the higher the chances become that you will eventually begin to add to the debt and potentially end up where you started. You must be willing to make a long-term committment to cutting back and saying "no" to life indulgences or you will defeat the entire purpose of your initial decision.

If you are already in financial trouble, you've must be careful in choosing a method to consolidate your debt. The best option, ultimately, is to turn to a financial advisor who can objectively analyze your situation. Always protect what is most important for you and your family.

 

But consumers need to remember that the debt, even at better terms, is still there. And they still have to be diligent about paying it off before they add to it.

For a smart move, look at what the consolidation will cost you for the total life of the loan, not just the monthly payment, says Todd Mark, spokesman for Consumer Credit Counseling Service of Greater Atlanta. And tread carefully.

Consolidation also can hurt your credit score if it involves a credit card, home loan or line of credit, says Craig Watts, public affair manager for Fair Isaac Corp., the company that developed credit scoring.

"Debt consolidation always has an effect on the credit report, so it always has an effect on the credit score," he says. Just how much the score will change, and for how long, depends on your report and how you treat your consolidation loan.

Want to gauge just how much that new card or loan could affect your credit? Go to the Fico Score Estimator at Bankrate.com. Calculate your score with and without the consolidation option.

If you're consolidating because you're in financial trouble, liquidate other assets first, advises, Ric Edelman, author of "Financial Security in Troubled Times." "You should not have money in assets if you also owe money in debt," he says. Three exceptions: mortgages, car loans and student loans.

But Bogosian disagrees. "Never use an appreciating asset to get rid of a depreciating asset," he says, adding that he'd tap life insurance first, if possible.

Bottom line: weigh the options carefully and do what will work best for you. And shop carefully.

What kind of consolidation loan should you tap?
If you have a plan for whittling down your debt and consolidation is part of it, what options should you tap? That depends on who you ask.

Rolling a handful of high-rate credit cards into one or two with better terms "works for people who have a certain amount of debt but aren't in the red zone," says Travis Plunkett, legislative director, Consumer Federation of America, a nonprofit advocacy group.

To avoid being late with payments, set up an automatic bank draft or e-bill payments to cover the minimums, says Howard.

Many financial advisers will caution against taking out a loan with the house as collateral, even if you're doing well financially. Others don't want to see consumers robbing their futures (retirement accounts) to get out of trouble now. And some believe it's a big mistake to trade asset producing accounts (like investments) to pay off debt.

Last year, 44 percent of consumers taking out home equity loans and 35 percent of those tapping home equity lines of credit used the proceeds to consolidate debt, according to figures from the Consumer Bankers Association. And the amount consumers accessed with cash-out refinancing shot from $26 billion in 2000 to $138 billion in 2003, according to figures from Freddie Mac. But consumers may be making a big mistake in tying their debts to their homes, according to several money experts.

If you're already in financial hot water, you've got to be more careful in choosing a method to consolidate your debt. When you're already having problems making your payments, you never want to take out a loan or line of credit against your home. "That's playing with fire," says Howard.

Edelman agrees. "You're in debt because you bought too many sweaters with your Visa card," he says. "There's nothing Visa can do about that. But once you tie your house to that, you can lose your house."

And too many people return to their old spending habits. "You're likely to build the debt back up again, only this time you won't have the equity to bail you out," Edelman says.

Look at your situation and protect what's most important for you and your family. Sometimes making some cutbacks (cable, shopping, etc.) and putting the extra money toward bills will be enough. You may decide to tap savings or investment accounts, rather than add more debt with a loan. And you might want to get some advice from a financial planner or debt counselor.