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Article Series: Debt
Relief & Debt Consolidation
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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.
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SolveYourProblem.com
: 2007
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