Common Question to Consolidating Debt Obligations
Here are a number of questions I have come across over the years to help with those looking to consolidate debt:
It is important to make the distinction that loans for people with bad credit are a tool while debt consolidation is a lending stratigy that uses a loan as a tool.
Debt Basics: Consolidate My Debt?
Lately you may have been hearing a lot of talk about debt consolidation and wondering about what that is, or asking yourself “should I consider consolidating my debt?” Our answer: that all depends on what type of debt you’ve got, your paying ability, and your credit rating.
Should student loans be consolidated?
If you’ve got several federal student loans or several private ones, you should consider consolidating as an option. It will not only make your payments easier, you could save money if you sign up for their automatic payment system. Even though consolidation will make the loan stretch out for a longer amount of time, you will receive no prepayment penalty if you wish to pay more than the monthly amount due. So if you were comfortable with what you were paying you could keep paying that amount even if it is more than what the consolidation requires and pay the loan off quicker.
Consolidation is not an option however for spouses that each have their own student loans, they can not combine and consolidate them. This does help to preserve the loans ability to cancel one of the persons loans in the event of a permanent disability or death of one of the spouses, which wouldn’t be possible if you consolidated them together.
Should my home loans be consolidated?
Yet again, “it depends” on your situation. If you’ve got a mortgage and have a home equity credit line, it might not be an advantage for you to consolidate. This line of credit is there and helps improve your financial flexibility. However, if your mortgage and home equity loans both have a high interest rate than what is currently being given, consolidation can help you to reduce costs by lowering the interest rates. But make sure that you factor in the new closing costs and the refinance fees that will be required upon consolidating. There are circumstances where refinancing can end up costing you more than you’d save if you consolidated.
Should my credit card debts be consolidated?
If you have many credit card balances, it’s usually wise for you to consolidate all of them into one. You could opt to apply for a home equity loan, that will dramatically reduce your interest rate you are paying and you most likely will get a tax deduction as well. Just make sure you don’t borrow too much than you actually need. Remember you are risking the home by opting for this loan. Also if you are paying down the home equity loan you should try and avoid creating any new debts.
If you feel uncomfortable borrowing against your main home to pay off your credit cards, the next best option would be a balance transfer. The balance transfer option usually has very low interest rates for a limited amount of time. Pay the maximum amount you can each month against your consolidated debt each month. If there is a zero percent transfer for a period of twelve months, that means 100 percent of the payment goes towards the debt, not toward interest. For many this helps by significantly saving them money and allowing them to finally pay the debt.
If you are able to pay off the credit cards without consolidating in six months or less, consolidation would probably not be needed. Even though you might save some money in interest, the fees for this may cancel out your savings.
If you do not like having numerous bills each month and want to streamline the finances in your life and save money, you might want to consider consolidation as an option. But before considering consolidation, make sure you know all the fees and costs and the benefits before making your final decision.
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