Debt Consolidation TipsPosted on August 19th, 2010 William No comments
Having a large number of bills come in every month can be overwhelming. Debt consolidation is a way to cut down on that, bundling everything into one large bill to keep things simple. Many companies also advertise that you can lower your monthly payment by consolidating your bills; while this is sometimes true, many factors must first be considered.
When looking at debt consolidation quotes, be sure to consider both the interest rate and the total amount to be paid. Debt consolidation may indeed lower your payments, but if it doesn't lower your average interest rate as well you'll pay more in the long run as your payments are stretched out for additional years. This is an old car salesman's trick: rather than telling you how much the car costs, he asks how much you want to pay per month. Of course, any reasonable amount is possible...provided you stretch out the term of the loan long enough!
Before considering debt consolidation, find the average interest rate your paying on your credit cards (and any other debt you want to consolidate). An easy way to approximate this is to add up the interest you pay on each card each month and divide this into the current amount owed; just be careful to look at the interest charge rather than the monthly payment. Your debt consolidation loan should be at a significantly lower interest rate than this average. Remember that you need to save money after paying any fees or there's no sense in doing the consolidation! If you have any low-cost loans, leave them out; there's no point in rolling a car loan at 6% into a consolidation loan at 10%!
As with other types of loans, if you own significant real property you may be able to find a better interest rate by accepting a secured loan rather than an unsecured loan. Credit cards are unsecured, meaning they can't come in and take your house away if you don't pay them; a secured loan is safer for the lender and thus deserves a lower interest rate.
Note that you don't necessarily need to use a debt consolidation service; if you have a low-interest credit card with a low balance and high limit, you can probably save money by doing a balance transfer. Just be careful to check both the fees and how long the low interest rate will last! Most credit card companies charge a 3% fee with no limit, but others (such as Discover) cap the fee at $75; if you transfer $7500 onto a low-interest card with the fee capped at $75 (which the author of this page has done), that knocks the fee down to only 1%! Be very careful with credit cards, though; one missed payment and they can jack up your rates (although the consumer-protection legislation that recently went into effect restricts how much they can screw you over for one missed payment these days).
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