Consumer Debt Consolidation

Creative Debt Consolidation
Written by Judy Moy   
Debt consolidation means rolling your smaller, higher credit card debt and loans into a larger, longer term and smaller interest rate loan.

If you are working on paying down your debt, the advantage to taking out some type of debt consolidation loan is to cut the amount of debt you have to pay each month. If your interest rates are lower, more of your money is going to principle than interest. Also, with the difference in what you were paying and the new payment, you have money to put against the loan and pay the principle off even faster. This can be a great tool for getting out of debt. There are several traditional methods for taking out a debt consolidation loan, and we will explore those briefly, but maybe there are a few options you haven’t considered. We will discuss a few of those options for debt consolidation at the end of the article.

Understand Your Debt

If you don’t know how much you are in debt or what interest rates you are paying, how will you know if any of the options make sense for you? Everyone’s situation is different, and it is important you really understand what you have before you sign up for something that doesn’t help your situation.

So write out a list that contains the account name, minimum monthly payment, interest rate and overall balance for every type of debt you have. Then go to a site like www.moneycentral.msn.com. They have tools like the ‘consolidate your debt time frame calculator’ that will allow you to play with the options and make an educated decision on what bills you should include, and which you should leave out. It will help you determine what interest rate you need and how long you need the loan for.

Traditional Debt Consolidation

There are many types of loans that you can get for traditional debt consolidation. These types include the following:
  • Cash-out Refinancing: This means you refinance your house and take all or a portion of the equity in cash to pay off other debts. The advantage of this type of loan is very low interest rates and the interest is tax-deductible. For this type of loan you need to understand the fees, appraisal costs and closing costs. The downside to this loan could be stretching payments out for 15 to 30 years. Figure the interest on the amount and make an informed decision.
  • Home Equity Loan: The advantages for this type of loan are similar to the cash-out refinance loan. They include larger amounts with a fairly low interest rate and tax-deductible interest. Make sure you get a fixed-rate loan. The term is usually at 15-years, but make sure to ask. Check the origination fee, the cost of appraisal and if you need title insurance, what it would cost.
  • Refinancing your car: It doesn’t have to be a car, it could be a boat, a savings account, or some other asset. The advantage to this type of secured asset loan might be the rate and shorter time period to pay the loan back. Say five years instead of fifteen or thirty with the real estate options. The downside to this is if you need a new car in a few years and owe more on the car than it is worth.
  • Personal Loan: A personal loan is an unsecured option. This might be called a signature loan or a personal line of credit. This type of loan might have an 11% or higher interest rate. But if you are paying 20% and more to credit card companies, this loan might still be a great option.

Non Traditional Debt Consolidation

In this day and age, it may pay you to get creative. Maybe this means borrowing money from a family member or friend. If you are considering this option, try a structured social lending site like www.virginmoney.com. This social lending site is provided by the owner of Virgin Air and Virgin Music. The site offers tools that will help you figure out an interest rate, provide the agreement in writing, and then help you set up a direct payment debit from your bank account to the family member that is lending the money.

The reason a family member might consider lending you money is that money market and CD rates are down. They aren’t making very much in interest on their savings accounts. If they lend the money to you, and you utilize a social lending site that allows you to compute interest and take a direct debit from your account, the family member can make a better return on their investment by lending the money to you.

Credit Unions

Consider joining a credit union even if you just start with a savings account. At a credit union you are a member. They often offer small holiday loans to their membership, or my credit union offers skip-a-payment on my car loan. This means I can use these options several times a year and pay off higher interest loans. It is a smaller chunk at a time, but eventually it adds up. 
 
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