Loan: The good, the bad and the ugly
Consolidation loans can be good,
but only if youíre the right fit. Letís talk about the proís and
conís of a debt consolidation loan versus consolidating your debt.
A debt consolidation loan
does not mean no debt, and it doesnít always mean less debt.
Consolidation is one of
those ďbuzzĒ words that you hear everyday, and some debt
consolidation companies would have you think that a debt
consolidation loan will ďset you freeĒ.
A consolidation loan is taking
out a loan to pay off your existing creditors. The assumption is
that you have a number of outstanding credit card bills and other
debts with high interest rates (i.e. 18%-22%), and with a
consolidation loan, you pay off all your lenders with this money,
and pay a much lower interest rate on this new loan (i.e. 9%).
Two things need to happen for a
debt consolidation loan to be successful for you. One, you must
insure that your new APR (Annual Percentage Rate) with the loan is
less than the total of your outstanding debt, and secondly, you must
close off all of the accounts that you just paid off with the loan.
If you can do these things, a consolidation loan could be good for
Make sure the lender does not
charge a large upfront fee that they donít tell you about. And also
watch out if the lender tries to roll the fee into the loan payments
in an attempt to hide it.
As mentioned above, you must
ensure that you close out all of the accounts that you just paid off
with the loan. Otherwise, the tendency will be to start using the
cards again because they have a zero balance. Then youíll have 2
debts. One with 22% and the other with 9%, and youíll be worse
shape than before. CLOSE THOSE ACCOUNTS.
Donít sign a debt consolidation
loan unless you know the following:
the principal amount you are borrowing.
what the APR will be.
how many payments you will make.
what the closing costs are, if any.
If these things are not spelled out
clearly on the contract, or you donít understand the contract, DONíT
SIGN IT. It will come back to haunt you later.
Also, donít keep any of
the cash that you got from the loan for yourself. Just borrow what
you need to pay off your debts.
Now lets look at the negative.
What youíre doing with a loan is converting unsecured debt into
secured debt. If you donít change your spending habits you could be
in a worse position than before. Remember, now that youíve paid off
your credit cards, the credit card companies will be eager to renew
your cards, with an even higher spending limit.
Quite often, the consolidation
loan is a
second mortgage which is secured by
your home. If you default on your monthly payments, you may lose
So it is important that you get
into a debt management program to help you avoid future credit
problems and avoid potential bankruptcy.
A debt consolidation program is
much different than a debt consolidation loan. In general, with
this kind of program, all existing creditors remain the same, except
that either through your efforts or a debt consolidation company,
interest rates are renegotiated, reduced or eliminated so that your
monthly payments are far less.
If you work closely with your
creditors, and once again, totally change your spending habits, you
may be able to eliminate your debt in 3-5 years.
Both programs have their merits,
and it depends which program best fits you.
About The Author
Paul Sauder is a successful
freelance writer providing helpful tips and advice for consumers on
His many years of mortgage industry experience have helped others
understand the business.
This article from "articles
for free" is reprinted with permission.
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