Eliminate Your Credit Card Debt, But How?
Can a debt consolidation loan eliminate
your credit card debt? A consolidation loan might
(or might not) be the key. There are several things
you must consider when making the choice to consolidate
debt using a debt consolidation loan.
First, is a debt consolidation loan
your best choice to eliminate or substantially reduce
your debt? There are other options available to you,
including credit counseling and bankruptcy. Obviously
bankruptcy is a last resort. You must examine several
factors when making your decision on which debt reduction
/ elimination strategy to use. You need to get information
on debt consolidation to make the correct decision.
How much outstanding debt do you have?
What is the interest rate of your current
debt? Many credit cards have interest rates of 14%
- 22%, depending upon your credit rating and payment
history. Obviously, the higher your current average
interest rate, the better off you will be if you consolidate
your debt with a consolidation loan at a much lower
rate.
How much of your outstanding debt is
unsecured? Unsecured debt has no collateral against
it. Credit cards, student loans, store charge cards
and medical bills are examples of unsecured debt.
If you have over $7,500 in unsecured debt there a
multitude of lenders that you can look at. Student
loans fall into a different classification from other
types of unsecured debt. In the United States, most
are backed by the federal government. Usually you
will have to use a secured debt consolidation loan
to pay off your unsecured loans. You may also be able
to refinance your secured debts, but you usually cannot
consolidate secured debts.
Do you own a home or other substantial
assets to use as collateral for a debt consolidation
loan? If you own a home or other real estate, how
much equity do you have in it?
What type of interest rate is available
to you for a consolidation loan? The interest rate
you receive on your loan is affected by a multitude
of factors including the prime rate. For student loans,
the borrower interest rate on consolidation loans
is currently calculated as the weighted average of
the interest rates in effect on the loans being consolidated,
rounded up to the nearest one-eighth of 1 percent.
They are capped at 8.25 percent.
How is your credit rating? Someone with
a very good credit score has options open to them
that those with lesser credit ratings do not.
Keep in mind that if you have more than
20% equity in your home, you are usually not required
to carry private mortgage insurance (PMI). If you
have reached the 20% equity stage through either paying
down the principal, asset appreciation, or both, you
can probably drop PMI and lower your payment. On the
flip side, if you are not paying PMI and you take
out a consolidation or other home equity loan, you
may put yourself back under the 20% equity threshold.
This would require you to get a new PMI policy. Factor
this in when making your cost / benefit analysis.
If you are constantly slipping backward
and your cash flow is poor, you can improve things
with a debt consolidation loan. Be careful and weigh
your options carefully. Take into account the tax
benefits you may receive by using a home equity loan
to consolidate your debt. This benefit will vary depending
upon your tax rate. You can get many free quotes for
debt consolidation loans. There are several places
that have multiple lenders compete for your business.
Talk to several lenders to see which will give you
the most favorable terms. You can substantially lower
your monthly payment and significantly improve your
cash flow situation with a debt consolidation loan.
Just make sure this is the right choice for your needs.
Steve writes about a multitude of topics
from home theater and automation to business and finance.
See his website, The
Debt and Loan Consolidation Guide for more information.
