Consumer Debt Consolidation

Debt Consolidation First Steps

Written by Judy Moy

Debt consolidation can be used as a strategy to combine separate loans and liabilities into one loan that should have a lower interest rate and monthly payment. If you are consolidating your loans, the amount you finance will allow you to pay one bill instead of several different bills every month. The loan taken from a bank, credit union or other financial institution might be an unsecured loan that is considered a personal loan, or it might be attached to your house or other secured debt. Credit Report A good place to start if you are considering a debt consolidation loan is with your credit report. You need to request your credit report from all three agencies and check your information. First make sure your name, address and employment information is correct. Then check each of the reported accounts and verify the balances, payment history and open or closed account information. If there are mistakes, report them to the credit agency and ask that they be corrected. Cleaning up your credit report can take thirty to forty-five days, so make sure you start with this report. It is important that your credit report be as clean as you can make it because any loan you get to consolidate debt will have an interest rate based on your credit scores. You can get a copy of your credit report free from many websites. One of the websites is www.annualcreditreport.com. Besides getting a free report from each of the three reporting agencies, you may be able to clear up some of the discrepancies online. Make sure you get all three reports, different creditors will report to different agencies and sometimes one agency will have erroneous information that another agency doesn’t list. Understanding the Numbers Once you’ve started the process of cleaning up your credit report, now you can start trying to figure out how much money you need and what makes the most impact to your bottom line. A good place to start this process is www.moneycentral.msn.com. They have several tools that will help you make informed decisions about your situation. One of these tools is a calculator called Consolidate Your Debt Payment calculator. This allows you to make adjustments to how much you pay monthly on a loan and see how it affects your pay off time frame. Another tool at this site is the Consolidate Your Debt Time Frame calculator. With this device you can enter different terms, say two years instead of three, and see how just changing the term of the loan commitment changes your payments and interest paid. These calculators are useful if you know the details of what you will be looking for. Make a list of all the bills you are considering rolling into a consolidation loan. Make sure you have the total amount due and the current interest rate for each loan as well as the monthly payment. Include how many payments are left for each loan. Then do some research by looking at your credit union or bank website. There will often be information on what the interest rate is now on personal loans. These posted interest rates usually reflect a higher FICA or credit report score, so depending on your personal rating, the interest rate may be higher by a few points. Once you have these figures, use the calculator tools to get an idea of what rates and terms you need to get from a lender to make consolidating your debt a worthwhile option. Loan Options Payment wise, your best option is to either refinance or take a second mortgage on your house. If you can qualify for a home equity loan or cash-out refinance, the interest rates and payments will be the lowest with these options. If you have really good credit, in the early months of 2010 the interest rates for this type of loan could be as low as 3-5%. The downside to doing this would be tying your house to this type of loan. The next best option for a lower interest rate is if you have a car or other asset that can be tied to the loan. If the car is paid off, consider financing it, or refinancing the car to include a few thousand extra to be utilized to pay off several of your small bills. This type of loan in early 2010 might be in the 5-14% range of interest depending on term and credit rating. You might look at loans that are secured by savings accounts. These can be in the 5% range if you have CDs or savings accounts to back them up. The third option is to get a personal or signature loan. Generally these loans are for $5,000 and less and are at about 11% interest. But if you are refinancing credit card debt with an interest rate in the 20% range, it is still a viable option.

 

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