Monthly Archives: August 2014

The Pros and Cons of Debt Consolidation Loans From Real Lenders

Advertisements abound for getting out of debt, or lowering your monthly payments. Debt consolidation ads can promise the world, and some are quite outlandish, making rather remarkable claims. The truth about debt consolidation is that yes you will eliminate debt, but not right away, as the act of debt consolidation involves by its very nature making new debt. With debt consolidation you take your existing debts and roll them into a new loan to pay off the older loans. This can put the unwary in even worse financial straits afterwards. Care must be taken to examine the new loan contract and to make sure you can meet the monthly payment terms, else you simply end up owing more than you did before the debt consolidation loan. These loans are designed to make the lender money, so yes you will be increasing your overall debt.

These loans can work for you however if you can budget yourself to meet the monthly payments and incur no new debt in the meantime.
If the loan does indeed have lower interest rates and the lifetime of the loan as close to the original debts, meaning you do not have to make payments for much longer than you would have with the original debts, a debt consolidation loan may indeed be the answer your looking for. if a debt consolidation loan is entered into cautiously, debt consolidation can greatly help you regain control of your finances. The key to it is obtaining favorable interest rates, a monthly payment amount you can handle, with the least amount of time required to pay off the debt in total. The longer the loan, the more cash you will pay out in the long run. It is best to tighten down expenses and go for a loan with a shorter duration, but a higher monthly payment then to stretch the debt out longer than necessary, for example your current debts might be 1150.00 per month for a period of 4 years,totaling $55,200.00 over the life of the debt, and your debt consolidation loan might be 600.00 dollars per month, but for a period of 10 years, totaling $78,000.00 in total, which is $22,800.00 more than originally owed. Before taking out any debt consolation loan you need to factor in these facts to decide if it is worth it overall, or shop around for a better debt consolidation loan, as not all debt consolidation loans are equal.

When it comes to the actual debt consolation you have quite a few choices. You can do a balance transfer if your debts are mainly credit card debt. A balance transfer can be advantageous if you find a card with a zero percent introductory APR of 2 months or more, and zero balance transfer fee. Finding a card with a zero balance transfer fee is not as easy however as finding a card with an introductory zero percent APR on balance transfers. You can use a bank or a finance company to take out a debt consolation loan, but I would recommend talking to your local credit union. Your local credit union will have better interest rates, and as a plus credit unions are often willing to work with those of less than perfect credit, especially if someone is trying to repair their credit and consolidate their loans into one easy loan. Banks and finance companies are for profit, while a credit union is not, and credit unions have lower operating expenses, and these savings get passed onto the credit union members in the form of lower interest rates on loans.

Changing ones spending habits is vital, but so is another key to getting out of debt, one that many Americans fail to grasp. The second key to getting out of debt is to save some excess income in some form of savings or an investment. A good rule of the thumb if you own a house for example is to save taking 1.5% of the homes value per year into an account. You should also set aside 20% going straight to savings. If you apply the 50/30/20 rule this can greatly help you avoid debt. The 50/30/20 rule is simple, you take your income and apply half or 50% to fixed and essential expenses, the expenses you need to live. Then you allot 30% for discretionary spending such as dinners out and entertainment, and the last 20% going into savings. These savings can be called upon in times of need, in many cases saving one the need to ever take out a loan in the first place.