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We will discuss another option available to debtors for becoming debt free.In this and later posts, we will discuss the choices you have available to you to discharge your debt obligations and become debt free. What is the objective? Freedom from debt.
- Pay Off Your Debt in Full
- Consumer Credit Counseling
- Debt Consolidation
- Debt Settlement
- Bankruptcy
Debt Consolidation Loans
Remember that someone is making a lot of money on debt consolidation loans, after all you cannot surf the Internet or watch TV for more than 5 minutes without seeing ads for debt consolidation.
If you own property such as a car or a home, you may qualify for a debt consolidation loan. A debt consolidation loan will exchange multiple debts for one larger consolidated debt. The amount of debt is shifted from several accounts to a single account. Instead of making multiple payments, you will make one larger payment on the new consolidated loan. Often this will lower monthly payments and/or reduce the interest rate. However, it will not reduce the amount of debt and you will still be obligated to repay 100% of the debt balance plus interest.
The reason the interest rate may be lower is because your debt was converted from unsecured to secured debt. Now, if the debtor is unable to make payments, the asset serving as collateral such as a house or car is at risk and may be foreclosed or repossessed. So the biggest disadvantage of a debt consolidation loan is that your car or home may be placed at risk if you experience difficulty making the payments. You may lose your home or your car because your debt became secured debt. Home equity loans are often used to pay off and consolidate credit card debt and a home equity loan is obviously a secured loan.
Beware of Scams
Before you begin to listen to offers for a loan, there's one thing you need to know. There is a growing deceptive practice because of the rising tide of credit problems and foreclosures known as the advance fee loan scam. The borrower (you) is required to pay large fees in to qualify for a their loan. The FDIC has issued a warning on this practice -“Advance fee loan scams prey on consumers who may be under financial duress and may be seeking quick and easy loan approval and funding. The scam typically involves the lender making false promises to arrange for a loan in return for fees paid upfront by the loan applicant. Scam artists may even design Web sites and online loan applications giving the appearance that the company is legitimate. “You can read more about this scam and the warning by the FDIC at The Federal Deposit Insurance Corporation (FDIC).
There are many legitimate companies offering debt consolidation loans. Make sure that any company you are considering is a good and ethical one.
Advantages of a Debt Consolidation Loan
- One payment to make as opposed to multiple payments
- Often the interest rate is lower on the consolidated loan than on the multiple unsecured debt accounts
- Monthly payout may be reduced due to lower interest rate
- Obligated to pay 100% of original debts
- Debt becomes secured
- Home or car may be at risk of foreclosure or repossession
Regardless of the debt relief option you choose, a debt elimination calendar and a simple family budget worksheet may be of some value to you.
Here are a couple of other tools that may be of assistance to you in determining what to do.
Free Online Compound Interest Calculator
Free Online Loan Calculator
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2 comments:
You can always negotiate your terms with debt consolidation companies but its best to consider all your options before taking the plunge. Thanks for the info!
When getting professional guidance, obtain a free debt consolidation quote from a trusted credit counselor. With this, you could lower your payments or settle for a reduced amount.
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