Debt Consolidation

Debt Consolidation

Many of us seem to be struggling with debt of one sort or another these days. The debt is usually divided up among a number of different sources. Each one of these sources has a different interest rate and other fees associated with them to add to our overall debt load. If you are a homeowner, there is a way to alleviate this type of situation. Debt consolidation is a method of combining several payments into one that will usually be lower than the total of those you are currently trying to pay.

The smaller payments will provide more room to juggle expenses in an emergency, and you can always make extra payments when there is some extra money left at the end of the month (make sure the loan does not have any penalties connected with paying off the loan early).

The majority of debt consolidation methods employ the taking-out of a second mortgage on your home. This second mortgage functions in the same way a typical home equity loan does – you are pledging your home as collateral and will be adding extra to your existing loan’s payment each month.

Most debt consolidation programs lessen your monthly payments by lowering your interest rate, but at the trade-off of extending your owe period (which of course means you’ll pay more interest in the long run), and also potentially raising your chances of home foreclosure.

You may want to consider consolidating your highest interest rate debts only, and pay off your low interest rate debts normally. Once your debt consolidation loan is paid in full, you will then finally be debt free again.

Debt Consolidation Advice

There are 4 major things you should be aware of when seeking debt consolidation:

1. Remember that if you consolidate, your debt is now secured by your home versus the multiple unsecured credit card debts. You are literally “betting your house” that you will be able to pay off your credit cards. If something happens and you can’t make payments, collections agencies collecting unpaid credit card debt can’t near as easily take your home than if it’s consolidated, since it isn’t pledged as collateral.
2. Beware of hard money lenders, who normally charge interest rates of 20% and over to high-risk borrowers. You’ll get your loan, and you monthly payment may be lower with one of these guys, but you'll end up paying more.
3. Debt consolidators who say they have all your finances under control and are your one-stop-shop. They normally throw in hidden fees, such as a 10% to 15% convenience charge (around $50 on a $500 monthly payment) and promise you things that you can do yourself. For example, visit the MSN Money Debt Consolidator to see how long it would take you to pay off all debts and how much it would end up costing you. What they’ll tell you will most likely be very similar.
4. A credit card balance transfer from one card to another can become a risk if not properly handled. As soon as you get a new credit card, be sure to mark the previous account "closed at customer's request." If you do not close your prior credit cared account then it will be marked as “closed by the creditor,” which makes you look risky and unsatisfactory in the eyes of the credit bureaus.

Using debt consolidation programs can help you or hurt you. You should be very aware that all these programs do is shift your debt – a debt consolidation program does not at all eliminate your debt. You still owe the money and will have to pay it back sooner or later. One thing you will notice after consolidating is that there will be credit available again on your credit cards, luring you to start charging and spending away. But be sure to remember that if you do, you are creating additional debt for yourself.

The easiest way not to use your credit cards is of course to cut them up and throw ‘em away, but heaven forbid, you might need them in case of an emergency somewhere down the road. Therefore, your best bet is to simply put them away from reach, “out of sight, out of mind” goes the saying, so that if you do decide to use one, it will be a conscious decision in the privacy of your home, not an impulse buy at the checkout counter of a busy department store.

Debt Consolidation Lenders

You should always shop around, and chose the debt consolidation program that’s right for you. Search for the best interest rate available with the best given terms and conditions. The following are potential sources and tips for when shopping for a debt consolidator: National Foundation for Credit Counseling - NFCC

The National Foundation for Credit Counseling is known for its reliable debt consolidation, nationwide. The NFCC is a government-operated organization that helps counsel consumer financial behavior and can help you diminish your debt for good. You can receive a free 1-hour debt consultation in person or by phone, and then decide if a consolidation is right for you. You just need to fill out a detailed form of all of your monthly and annual expenses and get it in. For more information, visit their site here