Debt Settlement

Category: Finance.

Next to winning the lottery, a debt consolidation loan is a debtor s dream. In reality, consolidating bills isn t always easy.

With one monthly payment and a fixed monthly payment schedule, you can actually see an end to those monthly payments. If you have a lot of debt, it can be hard to find a consolidation loan at a lower interest rate. Your goal in consolidating your debt should be to lower your overall costs. And if you re not careful, you can end up deeper in debt than when you started. To accomplish this there are two things to keep in mind: Get the lowest interest rate possible. Here are some of the best ways to consolidate: Using Credit Cards.

Have a plan to pay off your debts in 3- 5 years. The good news about this method is that with a good credit rating, you may get a much lower rate than other forms of consolidation loans. Go for a fixed rate if you can get it, and ask them to waive any transfer fees. And since credit card issuers don t require collateral, you aren t" risking the farm. " Call your current issuer to ask what interest rates they will offer you if you transfer balances from other cards over to theirs. If you can t negotiate a low rate with your current issuer, try shopping for a new card at a site such as CardRatings. com. Too many applications for credit in a short period of time can hurt your credit rating.

But be careful! Once you do consolidate this way, be sure to set up an optimal payment plan so you can be debt- free in 3- 5 years. With a home equity loan, you borrow against the value of you home, minus any other mortgages. Home Equity Loans. The two major kinds are: A Home Equity Loan- a fixed amount of money for a fixed period of time( sometimes at a fixed rate) and. These loans can offer attractive rates, and the interest, low payments is usually tax- deductible if you itemize.

A" Home Equity Line of Credit" where you borrow up to a pre- approved credit limit( interest rates usually variable) and can borrow again if you still have money available. Many issuers offer no or low closing costs for these loans. Cash Out Refinance. Interest rates are often variable, and there, however s always the risk that you can lose your home if you can t pay. Refinancing your home and taking out money to pay off bills( called" cash- out refinance" ) is yet another way to tap the equity in your home. One option to consider: an interest- only loan.

If you can refinance at a substantially lower interest rate, you ll eliminate the high interest costs of the debts you pay off, and you could even come out with a lower payment than you have right now since rates are so low. By lowering your monthly payment, you can free up money to use toward paying down other high- rate debt or building a retirement fund. Take any money you ve freed up by paying off other bills and use that to create an emergency savings fund. Make sure you understand the total cost of refinancing. Traditional Debt Consolidation Loans. Because lenders consider them risky loans, they re usually more expensive and not always easy to get if you have a lot of debt.

A debt consolidation loan is an unsecured personal loan, and the only collateral you are offering for the lender s security is you. If the interest rate is too high to make it worth it and the repayment term is ten or fifteen years, you should probably consider another method of consolidation. Remember, to calculate the total cost of the loan from start to pay- off. However, if the term and interest rate are right, this can be a great way to actually save money in the end. (Check Bankrate. com for current averages) . Credit Counseling. Instead, payment plans( usually with lower interest and fees) will be worked out for all of your eligible debts. Credit counseling agencies may help you get out of debt, though they don t actually consolidate your debt.

You ll make one monthly payment to the counseling agency, which will pay all your creditors. But be careful which agency you work with. Participating in a credit counseling program generally won t hurt your credit rating, and if you stick to the plan you can be out of debt in three to six years. If the counseling agency pays your bills late, you ll pay the price since you re still responsible to the lender. Debt Settlement. It happens. Debt settlement is another option that s become increasingly popular with consumers who have a lot of debt and can t, or won t, file bankruptcy.

Your creditors contact them, about your overdue, and not you bills. You stop paying your bills and instead make a regular monthly payment to the settlement company. As your accounts fall further behind, the negotiation company will settle your balances- usually for 50% of the balance or less( including fees) depending on the debt. It s not perfect. Most people can be out of debt in less than two years or less using these programs. Your credit rating will be hurt in the short run and you must be certain you re dealing with a reputable company or the money you pay each month could disappear. Retirement Loans.

Still, for consumers who can t shoulder the burden of debt they have now, it can be a very good option. If you have a 401( k) , 403( b) plan or certain types of pension plans, you can borrow against your nest egg. (You can t borrow against your IRA. ) It s easy, with no income qualifications or credit check. Also, if you leave or lose your job, you may have to pay your loan back immediately or pay taxes and penalties for an early withdrawal. The key here is to borrow against your retirement account, rather than withdraw from it early so that you don t end up paying taxes and a 10% penalty. These loans typically offer low interest rates, and interest is paid to you, since you are the lender. If you are in your 20 s and 30 s, you obviously have more time to rebuild a retirement nest egg, but even if you re in your 40 s or 50 s, you will want to weigh the cost of paying the high interest of the debts over time, versus borrowing from your retirement account. While tapping your next egg like this can short- change your retirement, so can costly debt payments.

The return you get from paying off high- rate debts is guaranteed- while the stock market isn t. There is a mathematically optimal way to pay your debts. Rapid Repayment. Choose a fixed level monthly payment, and commit to it each month. I almost always suggest consumers with debt start by creating one of these plans. Pay as much as you can on the highest rate debt first, while payment the minimums on the rest. Many people who do so find they don t even need to consolidate to get out of debt in the next few years.

Overview. They just need a plan and they can do it on their own. The biggest mistakes people make when it comes to consolidation are: A. Not having a plan for paying the debt off after they ve consolidated, and. Procrastination. Choose your approach, and start getting out of debt today! Waiting for the" perfect" solution to come along almost always means you ll end up deeper in debt.

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