When Your Bills Are Piling Up Here Are 6 Different Ways to Consolidate
By Mical Johnson
When it comes to debt consolidation some people dream of day when all
their bills will disappear. Next to hitting the jackpot, a debt
consolidation loan is some times the only way out for a debtor. No more
playing "pick the bill out of the hat" to see who gets paid, all you have is
one affordable check to write each month and pretty soon the balances
quickly disappear. WAKE UP! Come back to reality, it isn't quite that easy,
however if you do it right it works pretty well.
Different Ways to Consolidate
People ask me "What's the best way to consolidate debt?" and of course
"What's the catch?" Well, it just really depends on the situation. There are
all sorts of ways to do it and some folks get really creative too. I'll tell
you about some of the more popular ones and the pros and cons you get with
them.
Just remember because it looks good doesn't mean it is. The advertisers
now a days are pretty good about disguising those higher interest loans with
payments that go on forever because all you see is the lower payment. So try
and ignore that sweet pitch for a lower payment if it means you just dug
yourself a bigger hole and put yourself deeper in debt.
First things first. Let do a little wake up call. If you are just barely
trending water because you are in to much debt, just realize that not all
these options will work for you. And some times, no of them will. If that's
you, keep your head up high and don't drown. Many people can really cut
their debt without ever consolidating.
And don't forget, if you do decide to get a debt consolidation loan,
don't think the fairy god mother is going to make thing all better. After
all, once you do a debt consolidation you will still have to make a payment
until that loan is paid off.
Home Equity Loans
If you have been paying on your home for a couple of years, put a pretty
big down payment when you got it and are lucky enough to be in one of those
areas of the country where the home values shot through the roof, you may be
sitting on little piece of freedom in the form of equity in your home. To
get to this little nest egg you either have to sell your home or borrow
money against it. And so enters the home equity loan. Another little
thought...If you still owe a considerable amount on your home, IGNORE the
ads for home equity loans for more than the value of your home. Not only are
they very expensive but also very dangerous. And if you are still
considering one of those loans Contact Me and I'll be more than happy to
give you a hundred thousand reasons not to.
If you want to be a stickler about it there are actually two different
types of home equity loans. The first, which is my favorite, is the home
equity line of credit (HELOC), it uses the equity in you home like a credit
card. You can use a little as you want or up to your limit, and once you pay
it down enough you can keep on doing it. It's very useful when done
correctly because most of them have some sort of interest only option which
will give you greater flexibility. Hence, that's why it's my favorite. And
the other type is a fixed amount, rate and term. Your payment stays the same
all the time. Just to make this simple when I talk about a home equity loan
it will refer to both of these types.
Many people use home equity loans for debt consolidation. They will often
get a pretty good interest rate, and since you can deduct interest payments
on their taxes, making the "real" cost even lower. But, of course there is a
down side, you must use your home as collateral. Which is just a fancy term
to say if you miss your payment I can take your house. And There goes the
roof over your head...Literally!
Consider a Home Equity Loan for Debt Consolidation if:
You won't be leveraging your home so much that you are borrowing pretty
close to, or more than, the current market value of your home.
You can pay it back in 5 years or less
You are in debt because of unusual circumstances, like an unexpected
accident or hospital bill, but for the most part you have excellent money
management skills.
DON'T use a home equity loan for debt consolidation if:
You are going to have to borrow 100%-125% of your home's value. Interest
rates are high on these types of loans not to mention you will be stuck in
your house and won't be able to move for any reason for a very, very long
time.
Your marriage is on the rocks. Separation and divorce may not make it
possible for you to remain living there. Especially if you have a court
order to move. Not to mention you would loss a great deal of money if you
had to short sell it (You would still have to pay off the mortgage before
you can sell it)
Now if you think that you are in debt because you just don't make enough
money...well, I am surprised you made it this far. With that type of
thinking as soon as you pay off your credit cards you will just find another
excuse to charge them again, then your home will really be at risk.
Credit Cards
Consolidating your debt on a credit card comes off as a pretty bad idea;
however it can actually be a great resource if done correctly. Credit cards
sometimes offer some of the lowest interest rates around and they are easier
to acquire than most debt consolidation loans, but the best part is that
they don't require collateral like your home equity line does. That is an
important thing if a bad situation pops up and catches you unprepared. You
can either call your current card company and find out what their interest
rates will be on a balance transfer to their card, or if you are like me you
get tons of offers in the mail for companies offering to consolidate your
debt onto a credit card you can choose the best one. A big warning
here...READ THE FINE PRINT! Make sure if you transfer the balance it will
help you not hurt you. I give more tips on how to handle this in my FREE
newsletter so make sure you sign up.
Consider using a credit card for debt consolidation if:
You can get a lower interest rate; make sure it is a fixed rate and not
just a low intro rate, that's how they get you. Please Read The Fine Print.
You never pay the minimum payment, and they tease you with a really low
one, and you pay as much as your budget will allow each month to get rid of
the debt quickly, after all that's what this is for.
You close out the accounts that you are paying off so that you don't go
on a shopping spree. A word of caution if you close too many account it will
hurt your credit score.
Don't use a Credit card for debt consolidation if:
You can only get an interest rate that is higher than what you have
because you have bad, dinged, or a bruised credit history.
You are just so addicted to your credit card that you can't bear the
thought of getting rid of one or more of them.
You lack consistency in paying your bills on time. All those late fees
start to add up pretty quick at $25-$30 a pop, and then you pay 18%-30%
interest on the late fees...what a racket! Don't get caught in this little
trap.
Retirement Loans
I'm not going to give a lot of detail on this one because I think it is a
bad idea and only should be used to save you from bankruptcy. There are too
many big negatives other wise to consider this option for debt
consolidation. You loss your tax benefits and may have to pay a penalty if
this don't go smoothly for you. Not to mention the big kicker that if you
are borrowing money from yourself that means your money is not working for
you but against you. Not only that if you lose your job or quit you most
likely have to pay off the loan immediately. After you learn a few things
about investing you will see quite clearly how this is not such a great
option even though it's the easiest to get.
Debt Consolidation Loans
Even though they may seem to be the best choice or even the most logical,
it still may not be your best bet. A debt consolidation loan is an unsecured
personal loan, and they can be difficult to get if you already have a lot of
debt. The bank doesn't like to give you a loan if you monthly payment on
your debt not counting your mortgage is more than 15%-25%, depending on your
credit, of your gross monthly income (before taxes). The bank feels like you
are just going to go and charge back up your balances, which happens all too
often. Because of those big negatives the going interest rate on these types
of loans are about 15% or more. These are definitely not the best interest
rates compared to the other items we discussed so far. However, if you can
get a debt consolidation loan with an interest rate better than what you
have right now it may be beneficial for you to get one.
Consider a Debt Consolidation Loan if:
You are willing to close your credit card accounts so you don't end up in
the same trap everyone else does and dig a deeper hole of debt.
The interest rate you will be paying is lower than what you are paying
right now on any debts that you would consolidate. Make sure the term is not
more than 5 years or you could be falling into a different trap altogether
and end up paying way to much interest for the term of the loan.
Don't use a Debt Consolidation Loan if:
the most obvious reason is if the interest rate is way too high.
The term of the loan has been extended to 10 or 15 years. It will show
you a really cheap payment but wait until you add up all the money you will
be paying back you won't consider it a good deal then.
Counseling Agencies
As the ads on late night TV and cable claim to be able to consolidate
your debt i.e. "bills", into one small monthly payment "no matter what your
credit history". Every once in a while you these ads are for a home equity
loan, but more recently they have leaned to more often promoting credit
counseling agencies.
Counseling agencies go to the lender and negotiate a lower interest
and/or fee. After that you end up making one monthly payment to the
counseling agency, Which then pays your creditors. Their fee is lumped into
the monthly payment. A lot of times you could have done much better of for
yourself if you would have dealt with the creditors personally. This is not
really a debt consolidation loan since you don't really refinance anything,
it more like debt restructuring. If you can stick with the program you can
be out of debt in 3-5 years.
The biggest fear people have when dealing with the counseling agencies is
that the agencies will ruin their credit. Quite honestly if you are already
behind on your bills and haven't been able to put a dent in them, a
counseling agency debt consolidation program is not going to make your
credit much worse than it already is. It will make your score drop a bit,
but when you look at the benefit of being debt free a few years down the
line it's a lot better alternative to declaring bankruptcy.
Consider debt consolidation with a counseling agency if:
You are falling way behind on your bills and there is not another
alternative. These kinds of counseling programs are for people who are
having problems paying their bills on time, not for people who want a lower
interest rate.
Most of your debt is not a secured loan. In other words a car loan, home
loan, or a student loan. Since there is collateral involved the counseling
agency has a harder time renegotiating the terms.
Don't do debt consolidation with a counseling agency if:
You know yourself better than anyone else if you can't stick to a little
program for a week or a few months by all means don't try and do this
program that is going to take a few years to complete.
You haven't done you due diligence and thoroughly checked out the
company. Since they are acting as a mediator and you are paying them they
can screw things up really quickly and you will still be held responsible
(it really does happen check out the news release section) Make sure you
choose an agency that will give you the support you need for the long
haul...3-5 years.
Protect Yourself
Be wary of credit counseling organizations that:
-charge high up-front or monthly fees for enrolling in credit counseling
or a Debt Management Plan.
-pressure you to make "voluntary contributions," another name for fees.
-won't send you free information about the services they provide without
requiring you to provide personal financial information, such as credit card
account numbers, and balances. -try to enroll you in a Debt Managment
Program without spending time reviewing your financial situation.
-offer to enroll you in a Debt Managment Program without teaching you
budgeting and money management skills. -demand that you make payments into a
Debt Managment Program before your creditors have accepted you into the
program.
Creative Alternatives to Debt Consolidation
Now it's time to start to use that space between your ears, your brain.
Just because none of these options work for you doesn't mean that you should
give up! You have made it this far.
Borrow against the cash value of your life insurance policy. If you've
built up a cash value in your policy, you should be able to tap it at a low
rate. Best of all, it doesn't have to be repaid. The downside is that your
loan will decrease your death benefit, so make sure you have enough coverage
to protect your heirs. (You may want to buy a supplemental term policy.)
Make it easy for yourself call all your credit card companies and get
them to change the due dates that are more convenient for you so they fall
all on the same day right around payday. This way you sit down once or twice
a month to do your bills instead of 10 different days.
Think of Debt Consolidation as one of the many tools in you arsenal to
get yourself debt free.
Mical Johnson is affiliated with Rock Financial, Inc., a Licensed
Correspondent Mortgage Lender, Florida Department of Finance. Mr.Johnson
hosts Home Buyer’s Seminars which are open to the public each month in the
TampaBay area in Florida. To obtain a free copy of Mr. Johnson’s Home Buyer
Handbook contact him at
http://www.TampaMortgageGuy.com. He is also a contributing author at
http://www.Debt-Free-Personal-Finance.com
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