Debt Consolidation in 3 Easy Steps | Debts

Debt Consolidation in 3 Easy Steps

Written by Harold Throope

Sunday, 19 April 2009 13:30

by HaroldThroope

Debt consolidation allows you to do just that, consolidate your debt. Usually this means a lender will roll your current debts into one loan, allowing you to secure a fixed interest rate. Most often, you will be able to combine all your high interest rate loans and credit card debit into a single, lower-interest rate secured loan.

If you are in a position where debt consolidation is right for you, there are a few steps you should take to help you understand your debt. Understanding your debt will allow you to determine which type of loan, if any, is right for you. Here are a few things you should do first:

1) List all your current debts on paper. This list should include all of your credit cards, car loans, student loans, your mortgage, and any personal debts you may have.

2) After youve compiled this list, add columns for monthly payments, current interest rate, and balance due.

3) Calculate the amount of money you will actually spend on each loan over the lifetime of the loan. For example, if you pay the minimum balance on your credit card each month, over 30 years (the typical length of the life of the credit card loan) you could wind up paying $40,000. Obviously, this number depends on how much you owe and how much you are paying off and if you are continuing to add to your balance.

Once you review this information, youll have a better understand of your debt and will be able to make a more informed decision as to which type of debt consolidation loan is best for your individual circumstances.

Often when people think of debt consolidation loans, the idea of rolling all your credit card balances into one comes to mind. Its one of the easier debt consolidation methods. Credit card companies often solicit new business with a low APR offer on transferred balances. This is a very reasonable type of loan to consider. When doing so, you should take a look at the terms on all your current cards. Contact the card company that offers the lowest APR and see what theyre willing to do for you.

If you own a home, another method of debt consolidation available to you is a mortgage, either refinancing your existing mortgage or taking out a second mortgage. Since your home is being used as collateral, this can be a bit more risky than a balance transfer, however the interest rate is usually more favorable than a balance transfer rate. Often, however, this interest is tax deductible. You should also consider how much equity you have in your home, and how much it will be reduced by taking out additional money.

You may also want to consider enlisting the aid of family or friends, if you are fortunate enough to have any with the financial resources to help you. As with any other loan, you should draw up the terms of the loan and put them in writing. Make sure to include a repayment schedule and the agreed upon interest rate. This will help to alleviate any future confusion.

You can also contact a non-profit service, such as American Consumer Credit Counseling. They can negotiate lower payments for you. Often you will be writing a monthly check to them to cover the loans they will have consolidated for you. If you go this route, it is imperative that you investigate the service before you agree to sign up with them.

Once youve considered all the options available to you, it s time to take stock of the bottom line. Debt consolidation isnt magic. Youll still have debt to repay, and it is possible that your new loan will cost you more over the life of the loan, than your existing debt structure. Just because the monthly payments are less, doesnt mean the actual cost is less. Usually, however, this is not the case.

You should also make sure to review how much the loan will cost to acquire. Some loans require upfront fees, some recurring fees. Are there points, closing costs? What is the interest rate you will be charged? Is it fixed or adjustable? If this is all a little too confusing for you, enlist the aid of a financial advisor to help you determine which loan is best for your.

Finally, make sure to read the loan contract thoroughly. Are all the terms what you had agreed to originally? Is the interest rate correct? Are there any additional fees you had not been advised of?

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

Harold Throope, who has been involved in managing debt for more than a decade, has written a practical guide to selecting a debt consolidation program. For additional information on the best debt consolidation programs, please consult his website. Click here to get your own unique version of this article with free reprint rights.