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Eight Ways to Consolidate Debt
by: Gerri Detweiler
Next to winning the lottery, a debt consolidation loan is a debtors dream. With one monthly payment and a fixed monthly payment schedule, you can actually see an end to those monthly payments.
In reality, consolidating bills isnt always easy.
If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. And if youre not careful, you can end up deeper in debt than when you started.
Your goal in consolidating your debt should be to lower your overall costs.
To accomplish this there are two things to keep in mind:
Get the lowest interest rate possible
Have a plan to pay off your debts in 3 5 years.
Here are some of the best ways to consolidate:
Using Credit Cards
The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. And since credit card issuers dont require collateral, you arent risking the farm.
Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. Go for a fixed rate if you can get it, and ask them to waive any transfer fees.
If you cant negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings.
com.
But be careful! Too many applications for credit in a short period of time can hurt your credit rating.
Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt-free in 3 5 years.
Home Equity Loans
With a home equity loan, you borrow against the value of you home, minus any other mortgages. The two major kinds are: 1. A Home Equity Loan a fixed amount of money for a fixed period of time (sometimes at a fixed rate) and 2.
A Home Equity Line of Credit where you borrow up to a pre-approved credit limit (interest rates usually variable) and can borrow again if you still have money available.
These loans can offer attractive rates, low payments, and the interest is usually tax-deductible if you itemize.
Many issuers offer no or low closing costs for these loans.
Interest rates are often variable, however, and theres always the risk that you can lose your home if you cant pay.
Cash Out Refinance
Refinancing your home and taking out money to pay off bills (called cash-out refinance) is yet another way to tap the equity in your home.
If you can refinance at a substantially lower interest rate, youll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low.
One option to consider: an interest-only loan. By lowering your monthly payment, you can free up money to use toward paying down other high-rate debt or building a retirement fund.
Make sure you understand the total cost of refinancing.
Take any money youve freed up by paying off other bills and use that to create an emergency savings fund.
Traditional Debt Consolidation Loans
A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lenders security is you. Because lenders consider them risky loans, theyre usually more expensive and not always easy to get if you have a lot of debt.
If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation.
However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate.
com for current averages).
Remember, to calculate the total cost of the loan from start to pay-off.
Credit Counseling
Credit counseling agencies may help you get out of debt, though they dont actually consolidate your debt.
Instead, payment plans (usually with lower interest and fees) will be worked out for all of your eligible debts. Youll make one monthly payment to the counseling agency, which will pay all your creditors.
Participating in a credit counseling program generally wont hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years.
But be careful which agency you work with. If the counseling agency pays your bills late, youll pay the price since youre still responsible to the lender.
It happens.
Debt Settlement
Debt settlement is another option thats become increasingly popular with consumers who have a lot of debt and cant, or wont, file bankruptcy.
You stop paying your bills and instead make a regular monthly payment to the settlement company. Your creditors contact them, and not you, about your overdue bills.
As your accounts fall further behind, the negotiation company will settle your balances usually for 50% of the balance or less (including fees) depending on the debt. Most people can be out of debt in less than two years or less using these programs.
Its not perfect.
Your credit rating will be hurt in the short run and you must be certain youre dealing with a reputable company or the money you pay each month could disappear. Still, for consumers who cant shoulder the burden of debt they have now, it can be a very good option.
Retirement Loans
If you have a 401(k), 403(b) plan or certain types of pension plans, you can borrow against your nest egg.
(You cant borrow against your IRA.) Its easy, with no income qualifications or credit check.
The key here is to borrow against your retirement account, rather than withdraw from it early so that you dont end up paying taxes and a 10% penalty.
Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal.
These loans typically offer low interest rates, and interest is paid to you, since you are the lender. While tapping your next egg like this can short-change your retirement, so can costly debt payments.
If you are in your 20s and 30s, you obviously have more time to rebuild a retirement nest egg, but even if youre in your 40s or 50s, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. The return you get from paying off high-rate debts is guaranteed while the stock market isnt.
Rapid Repayment
There is a mathematically optimal way to pay your debts.
Choose a fixed level monthly payment, and commit to it each month. Pay as much as you can on the highest rate debt first, while payment the minimums on the rest.
I almost always suggest consumers with debt start by creating one of these plans.
Many people who do so find they dont even need to consolidate to get out of debt in the next few years. They just need a plan and they can do it on their own.
Overview
The biggest mistakes people make when it comes to consolidation are:
Not having a plan for paying the debt off after theyve consolidated, and
Procrastination.
Waiting for the perfect solution to come along almost always means youll end up deeper in debt.
Choose your approach, and start getting out of debt today!
For more information on dealing with debt, visit www.
stopdebtcollectorscold.
com.
Copyright 2003 by Gerri Detweiler, all rights reserved.
About The Author
Gerri Detweiler is considered one of the countrys top credit experts. She has been interviewed in thousands of radio, television and print news stories including USA Today, The Wall Street Journal, The New York Times, Dateline NBC and many others.
She has testified before Congress several times and worked on reform of the national credit reporting laws.
This article was posted on November 16, 2004
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And by doing so choose the path to success. The path that's going to lead you by the hand and have
a team behind the scenes to achieve
online business success.
You could have your online
business up and running
today.
And I mean seriously running... getting traffic, making money, the whole
thing.
And by this time next week you could have a whole bunch of
them...
And by this time next month... man the sky's the limit. You could
have
tons of sites, each ripping you down some serious profit. You could be
making thousands a week, just like I do.
BUT... none of that will happen unless you secure your place
right
now.
You see, everything you've done in your life so far has lead you
to
this point... and if you want to get past this point, you need to take
some action and shake some stuff up.
So do it. Hit the button below. I'll see you on the other side.
Look, I'm going to come totally clean and level with you right
now.
If you really want to make money online, The Home
Income Portal is
all you
need...
... no BS, no hype, that's a stone-cold fact.
It doesn't matter if you're just looking for an extra couple
hundred
bucks a week to pay the bills, or if you want to go the whole hog and
make
enough to buy sports cars and live the high life.
You know, hire a yacht, sail the world, that kind of thing.
Or maybe you just want to make enough to quit your job and have a
little
more freedom.
Whatever, it's your call.
The point is, The Home Income Portal can get you all that and more...
The life you want is waiting for you right now. All you need to
do to
get started is hit that button, and start building the life
you deserve...
Franchises in 46 Countries
Worldwide, Get Yours Today
Australia, Austria, Bahrain,
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Islands, Denmark, Dominica, England,
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Israel, Japan, Kenya, Kenota, Lebanon,
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Ireland, Norway, Paraguay, Philippines,
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(U.S.)Trinidad and Tobago, U. S. A.,
United Kingdom. Worlds largest business
opportunity with franchises in these
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