Consolidate Debt Loans

Thursday, November 15th, 2007 at 12:26 pm

Figuring out how to consolidate your debts can be quite difficult, and it doesn’t help that there seems to be an overwhelming number of options out there.

Are you swimming (or sinking!) in a pool of credit card and store card debt. Are you finding it increasingly difficult to meet your payments for these cards each month?

You may want to consider consolidating all your existing debt into a single loan generally referred to as a debt consolidation loan.

Some of the reasons you may want to consider such a loan include: -

* Often your monthly payments will be lower (in some cases dramatically lower) than your currently paying.

* Often the interest rate will be significantly lower that what you are paying on your credit or store cards.

* Easier to manage – You only need to make a single payment to one provider each month.

* If you are behind in your payments now, a consolidation loan will eliminate the endless calls and "overdue" notices you may be receiving. In addition it will prevent any further overdue fees or other fees such as "over your credit limit" fees, etc you may be attracting as a result of not keeping up with payments.

* It may help prevent you getting a bad credit rating due to non payment, or ensure that your credit score is not damaged any further.

* Reduce your level of debt – Because a debt consolidation generally (but not always) means you have to cut up your credit cards, you really will be reducing your debt levels each month with the payment you make on your debt consolidation loan because you will not be using your credit or store cards any longer.

Just imagine for a moment how it would feel to have the situation under control. To no longer be worried about finding the money to pay for all the credit card companies. Also think about the extra money you will have. What can you do with this extra money?

It would actually make sense to use any money you save as a result of consolidating your loan to make additional or increased payments on the debt consolidation loan to pay it off even quicker.

Whatever you do, you do not want to just waste the money. Maybe you can start a savings plan? Put it towards a goal such as a holiday, etc. But do the hard work first, get the loan paid off as quickly as possible and get your life back on track.

Debt Consolidation loans come in many ways, shapes, and forms. Some of the popular loans include: -

Secured Loans

This type of loan means the bank or provider of the loan has some security from you which they can take over or sell if you default on your payments. The "security" may be a house, a car, or other items. Generally they would not use household items as security.

Why would you want to allow the bank to have this control over your assets? Firstly the interest rate charged for the loan would generally be less than an unsecured loan meaning it saves you money. And if you going to pay the loan off anyway, there is no problem right?

If your worried about losing your job or not being able to make the loan repayments for health or other reasons, you can pay an extra fee for "insurance" so that in the event of you being unable to pay, the loan would be paid out for you. You may want to ask the bank for details about this, but be very careful to read all the options and more importantly understand exactly under what circumstances the loan would be repaid for you.

For example some loan insurance would only be paid out on your death, and not if you had a non life threatening illness. Other insurance would not even cover you even if you did have a life threatening illness! Be prepared to find out exactly what is included in your situation.

Another reason why you may need to consider a secured loan is in the case where you have bad credit, or simply if the bank, for what ever reason views you as a "bad risk". In other words the bank may insist on this type of loan.

If this is happening to you, it would be wise to look at other options as different banks have different lending criteria, and where one bank may reject a loan application altogether, another may insist on security for the loan, and a third be happy to offer you a loan unsecured.

It is a pretty competitive environment these days, so make sure you shop around. One thing to be careful about though, is putting through two many applications for credit with lots of different banks in a short period of time, because each application for credit is recorded on your credit file, and banks can sometimes look at lots of applications in an unfavorable way.

It would be better to shop around and get as many options as you can, and when your happy with the response, to lodge your application at that time (with only one provider).

Home Equity Loans

This is really a secured loan, because the "security" in this loan is the value in your home. Equity is the difference between the value of the house and what you owe on your home mortgage.

If your house is valued at $300,000 and your balance of your mortgage is $200,000 then you have equity of $100,000. If you sold your house for $300,000 tomorrow and paid the bank the money owing ($200,000) you would be left with $100,000.

The bank will often allow you to either take out a new debt consolidation loan if you have sufficient equity, or in some cases, will allow you to increase your existing mortgage by the amount you need to pay off your other debts (if you have enough equity).

Be aware that the bank will probably not allow you to borrow against the full amount of the equity, they may only allow you to use 50% or perhaps up to 80%.

This is to ensure the bank can easily recover all the money in the case of you being unable to pay. e.g. The bank could sell your house at a price cheaper that it was valued to ensure they got back their money in the quickest possible time.

This type of tactic is just one of the reasons why banks make so much money, they really set themselves up to ensure they do not lose under any circumstances.

Unsecured Loans

These are loans where the bank does not have security over a particular asset (such as your house). Generally you would pay a higher interest rate because the bank views it as a higher risk when compared to secured loans.

Pretty well all other aspects of the loan will be similar to a secured loan other than the security.

Other considerations

Banks will often charge fees for the establishment of a new loan, sometimes with ongoing monthly fees, or early payment fees (and other fees that deem fit to add).

As a minimum I would recommend you try to ensure that your loan can: -

* Have additional payments made to it without penalty.

* Can be paid out early.

* Has no or minimal monthly fees or other types of "hidden fees".

Be sure to check the fine print and carefully check the interest rate. Is it fixed for the life of the loan, or does it vary? Depending on your circumstances you may want it to be fixed or variable.

Debt consolidation loans when researched correctly can save you hundreds of dollars per month, not to mention getting your life back on track. Be sure to take your time to assess your options and get your life back in order today.