Bad Debt Management

What You Need to Know About a
Debt Consolidation Loan

The objective of a bill consolidation loan is intended to pay off all your current debts. This is accomplished by taking out one loan to pay for all your debts. In turn, you only pay one company instead of many. Theoretically, this sounds good… and it can be if you understand what you’re doing and have developed a solid financial plan to follow.

Many times a debt consolidation loan will lower both your monthly payment and your interest rate. There are many options for consolidating your debt. Here are some of the most common methods.

Home Mortgage Loans
Two types of debt consolidation loans are commonly used with homeowners. These are home equity loans and home refinance loans. Both types of loans use your home as collateral. You can expect a much lower interest rate compared to using a credit card. Sometimes, the rate is one-third the rate of your credit card.

As long as you make your payments on time and stick to your plan, you can save a lot of money in interest. However, if you fail to make your payments, you will lose your home.

Before you decide to get a debt consolidation mortgage loan, be sure to check out any upfront fees for getting the loan. Many times financial institutions will advertise a very low interest rate. What they don’t tell you is what it will cost you to get the loan. Don’t’ pay a large fee to get the loan. It will only increase your debt. Look and compare offers until you find a home loan that really saves you money when all costs are considered.

Debt Management Counseling
Getting an outside, objective opinion about your finances can be very helpful. The primary goal of a good debt management counselor is to devise a plan to pay off your bills. In the process they will teach you how to overcome bad debt management practices.

In many instances, they will not consolidate your bills. However, they are experts at negotiation. They can work with your creditors to reduce your interest rate and in many cases, your payment.

Commonly, you pay the counseling agent one payment and they pay all your bills. This will not affect your credit rating and should realistically pay off your bills in less than six years.

However, keep one thing in mind. You are still responsible for you finances. If the credit management company pays your bills late, your credit rating will suffer. If they fail to make a payment, you are still legally responsible.

Be sure to check out and compare multiple counselors before making a final decision. After all, it is your financial future at risk.

Borrowing Against Retirement Loans
If you have a retirement plan such as a 401 (k) or 403 (b), you may be able to borrow from your retirement funds to pay off you bills. The advantage of this is that you do not have to pre qualify. There is no credit check. The interest rate you will be required to pay will be considerably lower. One benefit is that you are paying yourself the interest.

Use caution when borrowing from retirement funds. You must not withdraw your retirement funds. You must borrow against your retirement funds. If you withdraw retirement funds, you are subject to a 10% penalty. However, that’s not all. You will also have to pay any taxes due.

In addition, if you lose your job or quit, you may have to immediately repay the loan. If you don’t you are subject to the taxes and penalties mentioned above.

Credit Card Consolidation
Frequently, many people use credit cards to consolidate their bills. It is one of the easiest ways to get a loan with no collateral. However, it also carries one of the highest risks. Let me explain.

Many credit card companies will give you a one-year period with no interest if you transfer all your debt to their credit card. This is the good news. It means that all your payment is applied to your debt without any additional interest.

At the end of the one-year period, your interest rate is generally lower than your previous rate. However, you can expect to pay ten to twelve percent interest. Therefore, you will pay more interest at that time. If you take advantage of the one-year grace period, you can substantially reduce your debt… especially if you pay much more than the minimum payment.

Now, here’s the catch. If you fail to make a payment on time or your payment does not process correctly, you will be charged a late fee. If you fail to pay a second time, your credit score will lowered.

However, that’s not the main problem. Read the fine print. In some cases, if you make a late payment or fail to make a payment, the one-year grace period is immediately terminated. That means you will begin paying interest immediately. It can still get worse. Your interest rate could be much higher than what was promised after one year. So… you loose or you loose.

The only safe way to use credit card debt consolidation is to make regular payments on time. These payments should be much more than the minimum required if you expect to reduce your overall debt. As the old saying goes, make hay while the sun shines. Pay off your debt while you have no interest.

If you’re concerned about making payments on time or can only make a minimum payment, don’t use credit card consolidation. It will only increase your stress and make your financial life harder.

One of these options will usually help you resolve your debt problem. It would be wise to get debt management counseling before choosing one of these options. In many cases, a specific plan can help you pay off your debts in less than five years. So, if you want to become debt free, choose the best bill consolidation loan for your specific financial situation and get started as soon as possible.

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