Debt Consolidation is the most common approach to dealing with debt. It comes in many names and forms. Debt Consolidation, Debt Management, Credit Counseling.
At a basic level, they are all forms of debt restructuring with the promise of lowered monthly payments, and reduced or eliminated interest. On the positive side there are many ways to consolidate debt that work more effectively for different people. When looking into a debt consolidation company, it is best to make sure that they consider strategies that are most suitable to your needs.
Here are some common Debt Consolidation Techniques.
Taking out a loan
This strategy is the most sketchy and unfortunately, one of the most frequently used methods of debt consolidation. The idea behind this is simple. You take out a loan equal to your entire debt, pay all of your loans and then make one ‘easy’ payment a month. The lure of this technique is that the interest rate of the principle loan is significantly lower than the interest of all previous loans, and in some cases, this method is effective.
The Down Side
However, two factors prevent this technique from being completely effective. First, depending on how consistently you have been making your monthly payments, there is a high probability that you will not be awarded a loan. Every time you fail to make the minimum monthly payment on credit card debt, that goes onto you credit rating. More often than not, people who seek debt help are already at the point of having missed monthly payments. And if you are awarded a loan it is usually not enough to cover your entire debt, leaving you in essentially the same situation as when you started.
Beware of Scams
Another problem with loans is that debt, and subsequent debt consolidation have become so common place in American society, the flood gates of Debt Consolidation scams have been blown wide open. If you have missed payments, not only are you penalized in terms of credit rating and interest rates, but you have probably been harassed by your creditors or in some cases collection agencies.
Debt weighs on nearly everybody’s conscience, and harassing calls add fuel to the fire of desperation. If you are suffering severe levels of debt related anxiety, you may be willing to do anything to pay these creditors off. This makes you vulnerable to Debt Consolidation Scams, which are variants of the all too common ‘Advance Fee Loan Scam.’ If you come across a loan company offering guaranteed loans at great interest rates with no credit check required, be wary. Most will probably require a application fee upfront. Many people who have sent money to these companies never hear from them again, or are rejected without refund of this fee.
Using Equity
Equity from your house or other real estate can be used to clear your debt. By using equity, the value of your home or property above its purchasing cost is used against your debt. This method is also known as ‘a second mortgage’. Lending institutions are more likely to offer loans, or larger loans to individuals who offer their homes as collateral.
The good news is, is that you are more likely to be able to consolidate all of your debt into to one lump sum, with a lower overall interest rate.
The bad news is, is if you run into debt again, the lending institution can foreclose on your home. If you are normally very good with money and your debt situation is the result of an extraordinary circumstance, (such as illness, lay off, etc.) then the second mortgage can be a viable method of clearing up all your unsecured debt.
However, if it happened once it can happen again. Not to mention it is not uncommon for people to view credit as income. Once the credit cards are cleared up many people feel it is alright to treat themselves to an expensive gift… on their credit cards! Consider the following testimony;
“When my husband and I married, we decided to pool the money from our wedding registry toward a new home. We bought all of our (household)
appliances through credit. Then we decided to have a child and I took time off work.
During this time, my husband was laid off, and soon we were found ourselves unable to make our payments. We confided with one of my cousins who suggested taking out a second mortgage. We tried this and everything seemed to be working. When I went back to work, we thought that we could pay off the second mortgage in no time, so we bought a second vehicle… on credit.
Soon we were buying a new large screen T.V., new clothes, and even financing a trip on credit. The next thing we knew, we had nearly as much debt as before, and a mortgage to pay. And the added income from my job was not enough to cover the balance.”
- Angela, Houston, TX
While using home equity may seem to be an effective way for some people to consolidate their debt effectively, the is a major hidden risk. Unsecured debt, credit card debt for example, for which payments are defaulted for a sufficient amount of time result in a worst case scenario of legal action on behalf of your creditors. Yes, the worst that can result is a through a court order, your creditor can put a lien on your home so that if you sell it, the money would go to them. If you trade this unsecured debt for secured debt, a home equity loan for example, your house if effectively used as collateral, and if payments on this loan are defaulted, you could lose your house! This was nearly the situation that Angela found herself in. But there was a happy ending to her story. Read on to find out.
Few people realize that there is another solution to burdensome debt, an approach that puts YOU in the driver’s seat – that levels the playing field between you and your creditors without having go to court.
That solution is debt negotiation – otherwise known as good old-fashioned American haggling. Haven’t you ever haggled over the price of a purchase? Well, exactly the same thing can be done for your debts!
Just imagine you could wave a magic wand and turn that $25,000 of credit card debt into $12,500 or as little as $9,000. Wouldn’t that make a big difference to your financial future? And while most people are skeptical that this approach is possible, if you have a professional debt negotiator on your team, the odds are very good that he or she can cut your debt by 50% or less.
Why Is This Option Possible?
For a moment, put yourself in the shoes of the manager of a collection department for a major credit card bank:
You know that bankruptcies are at an all-time high, that many consumers file bankruptcy at the drop of a hat, and that the chances of collecting any money get worse as the debt ages.
Let’s also say you have the opportunity to close your books on a delinquent account by collecting fifty-cents for every dollar owed by the debtor, or take a chance on never collecting a single penny by trying to hold out for the full account value.
You also realize that once the debt leaves your bank (usually after six months or so), it will go to a third-party collection agency. The agency will take at least 15%-20% commission right off the top of whatever they collect, and they are unlikely to collect more than 70% of the debt. So you’ll probably never retrieve much more than half of the money anyway. When you look at it this way, collecting 50% does not seem like such a bad prospect.
Now, the way we’ve described it, it sounds quite easy. You might be thinking, “OK, I’ll get on the phone and do this myself.”
What will happen? You’ll reach the “customer assistance team”, and the representative will inform you that other banks may settle for 50%, but that their bank never settles for less than 85%, under any circumstances. But, of course, they do have that wonderful hardship program for you.
After you’ve called five or six banks and received the same treatment, you’ll probably end up with the idea that debt negotiation doesn’t work. The problem is that the banks will rarely take a debtor seriously.
The banks are quite prepared for the amateur do-it-yourself negotiator. They have the telephone scripts all set up so that by the time the conversation is over, the caller feels guilty about the money owed, and their dubious hardship plan sounds like a great deal after all.
Retiring early is possible. This despite the corporate America’s dwindling pensions, labor downsizing and job insecurity. In fact, if you’re a normal human being working a job, you have probably thought about it a lot more than once. The fact is, the idea of working well into your mid sixties or early seventies is simply not as appealing as it was just a generation ago. For many people, the idea of retirement is equal to freedom, with more time to visit family, enjoy hobbies and travel. The problem with early retirement as a concept is that few of us actually do much to ensure we can accomplish it. To retire early, one must have a pretty robust plan to ensure that when the time comes, debt is minimized.
Retiring Early – Some Tips
Ok, so you think you’d like to retire early. Here’s a tip that may seem obvious: start saving early. The fact is, many people want to have their cake and eat it too, which is obviously an impossibility, especially in today’s financial climate. The earlier you start, the sooner you can start benefiting from the power of compound interest, which will turn your nest egg into an entire chicken farm.
When planning for retirement, ensure you understand a few important things first. Like, ensure you are comfortable with how much money you can live on. This is not a number to skimp on, especially in light of the inflation picture you will have to deal with in the future. As well, be realistic as to how long your retirement plan money will need to last. Remember that as health care gets better and better, your life is likely to get longer, so always over-estimate how long you will live.
Tools That Will Get You There
When creating a retirement plan, many people take a look at their 401K as the main vehicle of access. But, if you plan to retire early, they can become a problem. The reason why? The 401K is designed to allow you to access your funds at 59 ½ years of age. But, if you intend to retire sooner, you simply cannot access this money without substantial penalties. Remember this point, as if you do not plan for this, you could find yourself with very little money during the initial retirement years. As an alternative, make sure you are taking advantage of Roth IRAs, which is one of the best structured vehicles for early retirement seekers. And because Roth IRAs are pre-taxed, they can be withdrawn at any time. The money is available tax free at any time, and has no penalties attached, so it is obviously preferred for people considering early retirement.
Early retirement is a goal that many of us will actually be able to accomplish and enjoy in the years to come. There is no trick involved – it simply requires proper planning, avoiding credit card debt and good discipline. Starting your retirement plan now and sticking to it rigorously will ensure your retirement is as you planned it.
We’d all like to make managing our finances a little simpler if we could – and if you have a number of debts, one way of doing just that could be by consolidating them into one.
In short, debt consolidation involves paying off existing debts with a new loan (or another form of credit). In doing so, you’ll essentially be grouping (or ‘consolidating’) those debts into one large debt, which can make it easier to keep track of what you owe and how much you’re paying each month, as well as overall.(visit this site for more on debt consolidation)
Besides making your finances a bit easier to control, debt consolidation could also reduce what you pay each month. By choosing a longer repayment period, you can make each payment smaller, which can be very useful if you want to free up money for other things.
The downside to this is that a longer repayment period will also mean more time spent paying interest, and you could pay more as a result. But you could still pay less overall if you’re consolidating high-interest debts into a loan with a lower interest rate.
Different types of debt consolidation
There is more than one way to consolidate debt. Here are two of the most common methods.
Debt consolidation loan
A debt consolidation loan is quite simply a new loan taken out to pay off existing debts. You’ll borrow enough to cover the debts you want to pay off (plus any associated charges), and then you’ll repay the total to your new lender in single monthly payments.
A debt consolidation loan works much like any other personal loan – you’ll have monthly payments that you must meet, so you’ll have to be confident you can afford those payments.
0% balance transfer credit card
Credit cards are becoming increasingly popular for tackling debts. A 0% balance transfer card comes with an interest-free period on debts transferred across from elsewhere. In most cases, you’ll only be able to transfer across credit card debts, but it can make them much simpler and cheaper to repay.
In effect, you’ll be able to repay your debt interest-free for a while. Just make sure you pay it off by the end of the interest-free period if you’re determined to avoid paying any interest at all (although you’ll probably have to pay a balance transfer fee anyway when you transfer them to your new card).
Is debt consolidation the right choice for me?
Debt consolidation could be ideal if you’re managing your debts well but want to simplify your finances. However, anyone who’s really struggling with their finances should avoid it, as the difference it will make to their finances is unlikely to be significant enough to help with underlying financial problems. If you’re struggling, discuss your options with an expert debt adviser.
Does the headline above sound a bit simplistic to you? Perhaps it is, but it’s certainly a lot easier in theory than in practice for quite a lot of people. The personal and credit card debt picture in America tells this story better than anything else. Personal bankruptcies continue to grow in number, despite any hints that an economic recovery may be on the way. And with it, retirements are delayed, marriage difficulties occur with debt, and credit histories are ruined. Certainly the effects of not spending less outweigh those of living within (or below) your means.
Tips To Reduce Spending
There are a number of ways you can begin to reduce spending and thus reduce debt by making some simple, small changes in your life. First of all, you must look at your credit cards and credit card spending. How many do you have? Studies show that those with more than two credit cards typically tend to have the highest balances.
This makes a lot of sense, especially considering that multiple bills can start to be a real hassle when they come in every month. With multiple credit cards, it is easy to get confused with how much you are spending, and easier to come off your budget, despite your best intentions.
Another question to ask yourself about your credit cards is, “How much am I paying for my credit card?” Astonishingly enough, many credit cards still charge bloated annual fees on top of their already high rates. Avoid these cards and if you have one, find a card with a low-balance transfer interest rate and no fees.
Finally, make sure you are paying off your credit cards in full every month. And, as added protection, if you find that you cannot make your payment one month, cut up your card and only use debit or cash for payments. You’ll be surprised how much you save
Shopping, Shopping, Shopping!
If there is a key contributor to debt situations, it has got to be shopping. Nowhere else can you spend so much in so little time on things you do not necessarily need. But, avoiding shopping is very difficult to do altogether. After all, we’ve all got to eat. And when Grocery shopping (or any other kind, frankly) going with a list and sticking only to the list will save you thousands of dollars every year. Retailers call non-list shopping “impulse shopping”, and they love it. But, it can hurt you big time. Also, when shopping for groceries, consider bulk buying. It will save you even more money.
Bill Paying And Insurance
Let’s say you’re behind on your bills. First of all, you are not alone. And you can possibly get back on track on your own, provided the minimum payment trap hasn’t hurt you too bad. If you are behind, pay off the smallest bill first. Once you have paid off your smallest bill, cut up the card (if it’s a credit card bill), and then take the money you were paying on that bill and contribute it to your next bill. This way, your bills will all get paid off one by one, and you will pull yourself out of a potentially brutal hole.
Buying life insurance is important for everybody, particularly for those with families and assets. For this, buying term life insurance is always the best bet, particularly because it is so much cheaper than whole life insurance, and just much more effective. On an alternate insurance note, consider driving a used instead of new car, as the auto insurance will be less, on top of the actual price of the car.
Getting out of debt is never an easy process, no matter how deep you’ve gone. But, it not only takes work, but an entire shift of attitude. To get true debt reduction that stays, you’ve got to stop spending now.