Understanding Debt Consolidation
US Mortgage Corporation (NMLS ID#3901). Corporate Office is located at 201 Old Country Road, Suite 140, Melville, NY 11747; 631-580-2600 or (800) 562-6715 (LOANS15). Licensed Mortgage Banker-NYS Department of Financial Services- AK, AL, AR, CA, CO, CT, DC, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MA, MD, ME, MI, MN, MS, MT, NC, ND, NE, NH, NJ, NM, OH, OK, OR, PA, RI, SC, SD, TN, TX, VA, VT, WA, WI, WV, WY State Banking Departments/Regulators. Rates, fees and program guidelines are subject to change without notice. Certain restrictions may apply. Some loans arranged through third parties. First mortgages only. Not all products and/or programs are available in all states.
Table Of Contents Debt Consolidation... Page 01 Good Debt Vs. Bad Debt... Page 03 Advantages And Disadvantages Of Debt Consolidation... Page 05 What Can You Do To Consolidate Your Debts?... Page 07 Debt Consolidation Loans... Page 09 Debt Consolidation Loan, Debt Management Program, And Debt Negotiation: The Difference... Page 10 Things To Remember... Page 11
Debt Consolidation 01 www.usmortgage.com
If you are paying interest on many debts, you should be considering debt consolidation. The most common type of debt consolidation, a debt consolidation loan, combines a number of loads into a single loan with a single monthly payment. But note that debt consolidation is not meant for everyone. It is an important financial move and if you are considering it, you should tread with caution. Who Should Go For Debt Consolidation? First try to determine if going for debt consolidation is the best move. Maybe you can do better by devising your own strategy for debt consolidation. You could start with the smallest loan first. When you pay it off, you will feel that you can manage your debts well on your own. If you have many credit cards, see if you can get a lower interest rate by transferring your account to another company. If debt consolidation is the right strategy for you, then you may consider taking the help of a debt consolidator. But be careful here. There are many unscrupulous debt consolidators who will make big promises but not deliver any results. You will have to pay them a fee for rendering help, while you become late for a payment or even miss it. Low payments may not be enough, as such loans may get stretched for a long time and even the interest will pile up. Note that debt consolidation will not get rid of your debts. Debt consolidation is like a stepladder that you may use to climb out of bad debts. You will still have to work to climb the ladder. www.usmortgage.com 02
Good Debt VS. Bad Debt 03 www.usmortgage.com
Not all kinds of debts are good. Many people fail to realize this until they are in deep trouble. But there are good debts also. When you use it carefully, debt can help you build wealth. One of the steps to becoming wise with money is to understand what debts are good and what debts are bad. The difference is quite logical, but many people still fail to understand it. Good Debts Good debts create value, for example, investment debt like school loan, mortgage, business loan, and loan for real estate. Loans that produce wealth or are tax-deductible are also good debts. Many people have high interest rates on their credit cards but they still make mortgage payments using their credit cards. On the other hand, if you take out a home equity loan at a comparatively low interest rate, then it is considered a good debt. Bad Debts Purchasing disposable items or other durable goods with a high interest credit card can lead to bad debt. Here you don t have to pay the balance in full to the credit card company (at least in the near future). Trouble begins when people are not able to return the balance with interest within the date it is due. Note that every month when you make partial payments on the credit card account, you will be charged interest. Also, the durable or the disposable item you bought loses value as time progresses, while the amount you borrowed for it increases if you are unable to pay it off. When you bought clothes, they probably cost lesser than 50% of what you paid for them. So borrowing to pay for them is bad debt. www.usmortgage.com 04
Advantages And Disadvantages Of Debt Consolidation 05 www.usmortgage.com
Debt consolidation comes with its share of advantages and disadvantages. Advantages When you take a loan to consolidate other loans, the rate of interest that the bank or the financial institution will charge you is often lower than the interest rate charged on a credit card. A debt consolidation loan will actually help you save in monthly interest payments. Your credit cards and loans will be fully paid off. You can thus protect your credit rating by acting quickly. Further, you will only be paying a single monthly payment to the financial institution. So long as you follow the terms and conditions of the loan and make timely payments, your credit will not be affected negatively. Disadvantages A debt consolidation will help save interest charges, but you still have to contend with the consolidated debt, which represents your total debt. If you can still access your old credit cards and other debt accounts, the chances are high that you will make use of them and go into more debt. Many financial institutions are not as flexible as some of your creditors. If you run into any problems, the financial institution will not be that understanding and may even refuse take a payment if it is late. Therefore, make sure that consolidation is the best option before you go for it. www.usmortgage.com 06
What Can You Do To Consolidate Your Debt? 07 www.usmortgage.com
Any loan that you get will mostly be based on your FICO and credit score. If your credit score is actually good, you will be able to get a low rate consolidation loan, especially when your score has improved. Make sure that the credit score is accurate. If it is not, it could hurt the interest rate you get on the new loan. Consider Other Options If you only want to save money and are not in any kind of financial problems, see if you can pay off your loans on a priority basis. Try to maximize payments on your high interest loan, while paying only the minimum on others. This will help you minimize the charges you pay monthly. Speak To The Company That Gave You Your Credit Card If your credit is god, it may be possible to talk to the credit card company and get a lower rate of interest. If they are not giving you the lower rate you want, ask to transfer the balance to a company who is agreeing to give you the lower rate. Talk To An Agency That Offers Credit Counseling There are many reputed agencies that offer free or low-price credit counseling. They will tell you how you can manage debt, and even help you make a budget to control your finances. But you should choose your credit counseling agency carefully. There are many agencies who call themselves non-profits but still charge fees on one pretext or the other. Sell Your Automobile If you are not able to afford the payments on your car, think about selling the car to pay off the loan. Speak To The Mortgage Lender Many mortgage lenders will work with you when you tell them that you may temporarily have problems in paying them. They may suspend your payments and even ask you to make lower payments. There may be additional fees and even penalties for such an arrangement. Look into it before you make a decision. Borrow Against Your Insurance You can actually borrow against a life insurance policy. You can get an easy, low-interest loan to pay off your debts. Check on what implications this will have on your tax payments. Note that not paying back the money will result in the amount being deducted from the sum your beneficiary or you will otherwise get. www.usmortgage.com 08
Debt Consolidation Loans In simple terms, a debt consolidation loan is simply money borrowed to pay off existing loans. Consolidation actually means amassing all your debts and overdue balances and computing them into a single amount. You then take a single loan to pay off these debts. In this context, you will now owe money to a debt consolidator to whom you have to make monthly payments at a fixed rate of interest. These loans are attractive because they usually come with lower rates of interest compared to the high rates charged by credit card companies and other kinds of creditor. After you calculate what you owe your creditors, speak to the financial institution and ask for a sum that will cover your loans. In some cases, you may also have to keep your property as collateral. This is a secured debt consolidation loan. What if you have no property that can be made collateral? In this case you can still take a loan, but it will be an unsecured debt consolidation loan. The maximum amount you can borrow under these loan agreements is lesser than what you can get for a secured loan. If your credit rating is good or fair, it is easier to get these loans. Note that if you are offered a loan, you should take the chance to manage your finances better. This will help you avoid the debt rut. 09 www.usmortgage.com
Many companies that say they give consolidation loans are actually offering other kind of help such as settlement, debt management, and even bankruptcy. So how will you differentiate? Debt consolidation loans are simply loans that are taken to pay off other loans. Once your debt has been consolidated, you owe that money to the new lender and not to your old creditors. Consolidated loans will reduce interest payments and even extend the repayment time. Your credit may be blemished temporarily, but it is nowhere close to what debt negotiations or other programs do. Debt management programs also reduce payments but they do it in a different way. A debt management company will act on your behalf in negotiations with the creditors and try to lower your interest rates or other fees. You then pay an agreed amount every month to your debt management company and they (after deducting their fees) will transfer the amount to the creditors. If you participate in debt management programs, it shows up on the credit report and affects the credit rating. Debt negotiation is where you settle a debt for less than that owed by you. You pay a part of the debt to the creditor and the rest of it is written off. To recoup some losses, credit card companies will often ask for lump sum payments. You will owe less money to the companies, but such a settlement will damage your credit. There are even some unscrupulous companies that will offer debt negotiation in the guise of debt consolidation. Debt Consolidation Loan, Debt Management Program, And Debt Negotiation: The Difference www.usmortgage.com 10
Things To Remember ¾ Before you meet a loan officer, make a list of all your current debts to understand how much debt you actually have. The loan officer is going to get this information anyway, when he or she pulls your credit report. ¾ If the rate of interest on the loan you are being offered is very high, look around for a financial institution which is offering you the same loan at a lower rate. ¾ There are many finance companies who offer consolidation loans, but they may be offering these loans at higher rates compared to mainstream financial institutions. Before you sign on the dotted line or even agree for anything, look into the interest rate, the loan period, fees, and special terms. This way you will know how much you will be exactly paying. ¾ Most financial institutions (once they agree to give you a loan) may pay your creditors themselves. It may be possible to convince your lending institution that you can do so yourself. ¾ Your credit accounts with credit card companies, stores, and businesses may be closed by your financial institution to ensure that while you are paying the consolidation loan, your debts don t increase. 11 www.usmortgage.com
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