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Debt Consolidation: Frequently Asked Questions
   

The term “debt consolidation” is being heard more and more often these days, as interest only loans choke the last pennies from debt-ridden families, and many have to rely on credit cards to make ends meet. The result of plastic oriented consumerism is a budget that is stretched to the max, and most folks at some point realize that something has to give. It is usually at that point that the term debt consolidation enters the picture.

Here are some FAQs on debt consolidation that will help you to get a good overview of the process, the steps involved, and also some of the pitfalls that might await you if you are not careful.

What is debt consolidation?

Typically, when speaking of debt consolidation the idea is to take out a loan to pay of a bunch of other little loans that one has accumulated. Now, these little loans do not necessarily have to be personal loans but may also refer to unsecured creditors, such as credit cards, medical bills, or student loans.

Why does the lender ask if I am a homeowner?

If you are a homeowner, you will most likely be able to take out a secured loan against your home to pay off these little loans. If you decide to do so, the loan is called a home equity loan. The advantage is that the interest may be tax deductible – whereas the credit card interest most certainly is not – yet the disadvantage is the fact that you are encumbering your biggest asset: your home. If you are planning on selling it, both the mortgage and the home equity loan have to be paid off in full before you can realize any profit from the sale.

I don’t want to take out a home equity loan. Is there still a loan product for me?

If you do not want to take out a loan against your home, you could apply for an unsecured personal loan. Talking to a local lender, such as your bank, can do this or you can contact a lender online via the Internet. If you decide to go this route, make sure you read the fine print and understand the intricacies of the loan, such as the repayment terms, the interest rate, whether or not you incur a prepayment penalty if you pay off this loan early and if your interest rate is fixed or variable.

What kinds of personal loans are there for debt consolidation?

Some personal loans will be revolving lines of credit with an open-ended repayment date and a variable interest rate while others will be a straight forward loan with a fixed interest rate and a specified number of payments.

What do I do if I do not qualify for a loan and do not own a home?

In this case you might be a good candidate for a debt consolidation company to help you. While these companies do not make loans, they will contact each of your creditors to negotiate lower monthly payments, lower interest rates, perhaps even a reversal of late fees you already incurred, and perhaps a re-aging of your account on your credit report to move it to a current status. In return, they may require you to pay a small monthly fee to them, to cut up your credit cards, and to stay away from applying for any more debt.

What is the advantage of consolidating my debt with such a company?

Within fixed period of time, usually three to six years, you will be out of debt. Additionally, you will be able to make one lower payment to the debt management company who will then disburse it to all your creditors. Since you will probably have cut up your cards, you should have a good handle on your finances by the time you are out of debt and you will probably not fall into the same traps as you did before.

Are there disadvantages of consolidating my debt with a debt consolidation company?

Yes, indeed there are some disadvantages. Your credit report may have a notation that you have renegotiated your credit terms, which may be a red flag to future creditors and may adversely affect you when shopping around for a car loan or mortgage. Additionally, if you are living above your means and need that credit card to survive, you will probably find yourself in dire straits when you have to cut it up.

Click here if you are drowning in credit card debt, facing foreclosure, being harassed my debt collectors or simply feel like a victim of this economic crisis. It's my SolveYourProblem recommendation.

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by SolveYourProblem.com : 2007

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