Secrets for Successful Debt Consolidation

Debt consolidation is a way to collect all your individual debts and lump them into a single loan. It works well to combine overdraft, credit card, and automobile loans. By consolidating your debt you only make one payment to one creditor. Usually, you can negotiate better terms, a lower interest rate, and quicker payoff times. But is debt consolidation always the best idea for you? More importantly, do lenders have your best interest in mind?

Debt consolidation is growing very quickly. It takes the form of balance transfers on credit cards to official ‘debt consolidation’ issued by lenders. There are literally billions and billions of dollars of debt being transferred from one account to the other.

The positive aspects of debt consolidation make sense. Who wouldn’t want lower interest rates, a longer payback term, while paying more towards your principle the whole time? But be careful of a few things.

Secret One:
Is your loan going to be unsecured or secured after you consolidate? Debt is usually extended because lenders expect you to pay them back. An unsecured loan is like a signature loan or a good will loan from a friend. They don’t make you put anything on the line in the event you don’t pay. Instead they loan you the money solely on your ability to repay the loan. On the other hand there are secured loans. A secured loan means that you offer a piece of collateral and the bank will lend you the money. That collateral could be your house, your boat, or a sum of money in an account. If for any reason you default, or don’t pay the loan back, the bank has every right to take your home, your boat, or the sum of money you have deposited. When you consolidate your debt make sure you know if it is an unsecured or a secured loan.

Secret Two:
Is the new interest rate fixed or variable? A fixed interest rate is when the interest rate is the same until the loan is paid off. The interest rate you start out with will be the interest rate you end with. It doesn’t matter if the lender’s rates go up and down because you will have a fixed interest rate. The other type of loan is the variable interest rate. Usually, variable interest rates have an introductory offer. The offer can last anywhere from three months to five years. After the offer expires your rate will adjust to a new rate. These loans are popular because the introduction rate is so much lower than other rates. It’s also tempting to get a variable rate because most people don’t think they will be affected by the rate change. These variable interest loans were very popular before the great depression hit America in the 1930’s. They should be avoided.

Secret Three:
What is the bottom line of your total payments? Most people don’t realize that their debt will cost them 200% more after they’ve made payments over time. The car you bought for $10,000 could end up costing you $30,000 in the end. When you consolidate your debt, look at the end numbers. Are you paying three dollars for every dollar you’ve borrowed? If you can, try to get an amortization table on your loan. This will tell you how much interest and how much principle you are paying with each payment. At first you will be paying 80% interest and only 20% principle. That means every time you make a $100 payment only $20 is going towards your loan. It’s hard to believe but it’s true.

The more you know the more likely you’ll be to make the right decision. As always best wishes and good luck!