May Encourage Increased Spending
Similarly, paying off credit cards and other lines of credit with a debt consolidation loan may create the illusion of having more money than you actually have. Its easy for borrowers to fall into the trap of paying off debts, only to find their balances have climbed once again.
Make a budget to reduce spending and stay on top of payments so you dont end up racking up more debt than you started with.
When You Plan To Continue Spending
Becoming debt-free is usually the goal of taking out a debt consolidation loan.
You cant do that if you plan to continue using your credit cards after you pay them off with a debt consolidation loan. You could soon find yourself with a big personal loan to pay off and maxed-out credit cards a bad financial situation to be in.
You can help avoid this fate by living on a budget for several months before getting a consolidation loan. Once youre confident you can stick to the budget and make monthly payments on a new consolidation loan you can consider moving forward.
Know Your Balance: Can You Meet Your Minimum Payments
Using your minimum credit card payments, add up each of your monthly credit card bills. Is your monthly bill total larger than your monthly income or does your income out earn your bills? Use your knowledge of your overall balance to select a credit card debt consolidation solution that fits your situation:
Read Also: Refi An Fha Loan
Is Debt Consolidation Right For You
Consider the following questions when deciding whether loan consolidation is in your best interest.
- Can you afford the consolidation loan? Even if the consolidation loan reduces what you have to pay each month, if you don’t have a steady income or can’t afford the new monthly payment on the loan, consolidating probably won’t help your finances.
- Can you get a lower interest rate? If you can’t get a lower interest rate with a consolidation loan, then it’s probably not worth the extra cost and fees you’ll incur consolidating.
- How long will it take to pay off the consolidation loan? If you extend the repayment term when consolidating your debt, you’ll most likely pay more interest over the life of the loan.
Debt Consolidation Vs Debt Settlement Whats The Difference
Most of the debt repayment options that people know about are designed to benefit the company lending you money. Creditors do not always care about you or your struggle to climb out of debt. They only want their investment to pay off.
Lending money is about returning a profit. Be careful about the advice you receiveand who is giving it. For example, a non-profit credit counselor might offer a program to settle with your creditors by paying 100% of the debt.
This is wonderful for your creditors. In fact, creditors often fund the non-profit credit counselors as the counselors recommend that you pay back everything you owe in full.
With the option to settle, you may be able to actually reduce the amount of money that is owed but the effect on a credit rating is often negative since you are not paying the debt back in full or on the original terms and conditions agreed when the credit was advanced.
This negotiation process requires the creditors to agree to the new payment amount and the new payment terms.
So debt settlement can reduce the amount of money you owe but can harm your credit rating.
Without a good credit rating, it becomes very hard to rebuild your finances. Debt settlement can be a good short-term solution for you, but can also have negative consequences on your future finances and you could end up right back where you started. If you are considering any type of debt settlement you need to make sure the
You May Like: How To Transfer Car Loan To Another Person
Disadvantages Of Consolidation Loans
Limited applicability
This solution does not work for everyone. You generally need a good to excellent credit score to qualify for an interest rate that makes this beneficial. At a minimum, you generally need a credit score of 650 or higher to qualify for this solution. Ideally, you want very good credit to qualify for the lowest rate possible. That requires a score of 720 or higher.
Rates on personal loans can range from 5 percent up to 45 percent. If the rate on the loan is comparable to your credit card rates, you wont get as much benefit. In general, this solution offers the most benefit when you can qualify for a rate of 10 percent or less on the loan.
Lower payments depend on how much you owe
If youre seeking lower payments to balance your budget, this solution may not work depending on how much you owe. Most lenders only offer terms of 12-60 months on debt consolidation loans. A longer term will lower the payments. However, the amount also depends on how much you owe.
For example, lets say you owe more than $50,000. You have excellent credit so you qualify for a 5% APR. Even at the maximum term of 60 payments, your payments would be more than $900.
Always make sure you can afford the monthly payments on the consolidation loan before you decide to use this solution.
Risk of more debt instead of less
It May take up to 5 years
How To Consolidate Your Car Loans In 6 Steps
Follow these steps to find a lender and apply for auto loan consolidation:
Step 1: Review your current car loans rates and terms.
Knowing what you already have is key to making sure you can qualify and that consolidating is actually a good deal. Check with your current loan providers for the following information:
- Loan balances. Add up your current loan balances to get a rough idea of how much you need to borrow. Theres a chance youll need to borrow more if you consolidate before your next repayment youll have more interest that hasnt been paid off yet.
- Take the APR for each car loan and find the average. Ideally, youre looking for a new APR below this average if your goal is to save.
- Monthly repayments. Add up your monthly repayments. If youre trying to reduce the cost, youll want to aim for a loan with a new rate and term that gives you monthly repayments lower than this amount.
Make sure you wont pay extra
Car loan consolidation can cost you more if one of your current lenders charges extra for paying off your loan early. Look at your loan contract for any prepayment penalties.
Also, ask about how your interest is added up. If your loan comes with add-on or precomputed interest, its cheaper to stick with your current loan. Otherwise, youll end up paying interest on interest.
Step 2: Check your credit score and report.
Find a mistake? Reach out to the creditor to have it corrected before you apply for a loan.
Step 3: Compare auto loan consolidation providers.
Read Also: How Much Car Loan Can I Afford Calculator
Missing Payments Will Set You Back Even Further
If you miss one of your monthly loan payments, youll likely have to pay a late payment fee. In addition, if a payment is returned due to insufficient funds, some lenders will charge you a returned payment fee. These fees can greatly increase your borrowing costs.
Also, since lenders typically report a late payment to the credit bureaus after it becomes 30 days past due, your credit score can suffer serious damage. This can make it harder for you to qualify for future loans and get the best interest rate.
To reduce your chances of missing a payment, enroll in the lenders automatic payment program if it has one.
Takeaway: Before you take out a debt consolidation loan, make sure you can afford the monthly payments. Missing a payment can lead to late fees and a lower credit score.
Home Equity Borrowing Options
There is also a range of borrowing options available to Canadian homeowners. With these options, you borrow against the equity in your home, which is the current appraised value of the home minus the remaining balance on the mortgage.
Borrowing against home equity can be beneficial because you can qualify for a lower interest rate even with a weaker credit score. However, it also creates more risk for you as a borrower. If you default on the payments, you may be at risk of foreclosure.
In general, it is not recommended to use home equity solely for the purpose of paying off unsecured debt. However, if you refinance or have a HELOC and want to use some of the funds to pay off a few credit cards, it may be in your best interest to do so.
Read Also: What Credit Score Is Needed For Usaa Auto Loan
Can I Refinance My Car Or Consolidate All Debt Rose
Dear Steve,
I have about $45K worth of debt. I have four credit cards with balances of $500 each. I have IRS debt of $1600 and $3000 balance on Best buy card. And a $38K auto loan. Truthfully, its the auto loan that is killing me. I pay 13% interest. SO now my loan is upside down. its higher then worth of car. My monthly payment is $953.
Dont know exactly what I can do, Id like to either refinance car or consolidate all debt and pay one payment rahter than 6 difference plus normal monthly expenses.
Can I either refinance my car or consolidate all debt.
Rose
I asked my friend Mike Killian to answer your question for you. I wanted to make sure you got an answer as quickly as possible as Im a bit backed up at the moment. Ill be watching the comments on this question and be around to help if you need me.
Sincerly,You are not alone. I’m here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don’t give up.
Rose, I am certain you are painfully aware of the woes of todays economy. One of the end results of this plight is exceptionally tight credit. Of course attempting to refinance the car is a great option and I think you should try but tight credit means limited loans being issued and rarely without a good credit score.
Do You Have a Question You’d Like Steve to Answer? .
Sincerely,
Other Options That Dont Require New Financing
New debt may not always be the best solution for solving challenges with existing debt. If you owe more than $50,000 or you have a bad credit score, you may not qualify for a consolidation loan. Even if you can qualify, it may not be the best option depending on your situation.
You may want to consider other options if:
- Youre living paycheck to paycheck
- You have no money in savings
- Youve consolidated previously and are still facing challenges
- Your credit score is low
- You feel like your financial control is slipping away
In these cases, you may be better off with other debt relief options.
Debt management
A debt management program is a professional assisted repayment plan. Like consolidation, it gives you one monthly payment and minimizes interest charges. But you dont get a new loan. Instead, a agency helps you set up a plan that pays back everything you owe in a more efficient way.
Read Also: What Credit Score Is Needed For Usaa Auto Loan
Your Credit Score Will Play A Role
While you can still get a personal loan with a bad credit score, it affects the rates and terms you are offered. if your credit score has improved since you took out the original loans, you may find better interest rates on offer. In this case, a debt consolidation loan could be a good idea. But if youre struggling to meet repayments and your credit score hasnt improved, then any interest rates offered will be roughly the same, or worse, than your current ones.
In this case, you probably wont be better off with a debt consolidation loan. And in the long run, it could cost you more. But, it could still be worth it, in some cases, if your main issue is your regular repayments. By extending the loan period you may be able to reduce the regular repayments to a more manageable level. But be aware, youll be paying off the loan for longer, and will pay more interest as a result.
Whatever your decision, taking proactive steps to improve your credit score is a good idea. Its good to be doing what you can to get that rating up, as itll make things a lot easier when it comes to securing finance further down the road.
The Truth About Debt Consolidation
12 Minute Read | September 10, 2021
When youre stuck in the deep end of credit card debt, student loan payments, car loans and medical bills, its hard to stay above water. Youre probably looking for a life preserver, and maybe youve heard about different methods out there that offer helplike consolidating, balancing, transferring, refinancing or settling your debts.
Hey, we understand your fears and frustrations, but you need to know the truth about debt consolidation. Because most of these schemes are run by companies who claim to offer hope but really just want a profit. But listen carefully: There is real hope for you. Lets look through your options so you can get out of the dangerous waters of debt for good.
You May Like: How Do I Find Out My Auto Loan Account Number
Shop For The Best Loan
Its always a good idea to get multiple quotes for loans before you choose one. Lenders can offer different rates, terms, fees, and incentives, such as giving you a rate discount if you use AutoPay.
You want to find the rate with the lowest interest rate and fees, the most flexible terms that fit your needs. Only then should you apply.
Good places to look for quotes:
Make sure while shopping that you specify that you are only seeking a quote.
If you apply for a loan, it will create a credit inquiry on your credit report that will decrease your credit score by a few points. If you apply for several loans at once, it can damage your credit, even if you only end up taking one loan.
Does Debt Consolidation Work On A Limited Income
Debt consolidation can be difficult for people on a limited income. There must be room in your monthly budget for a payment that at least trims the balance owed. Even with a limited income, however, there can be places where you reduce expenses — dont eat out eliminate cable and other entertainment spending no trips to clothing stores — to make debt consolidation work. It may come down to how committed you are to eliminating debt.
Also Check: How To Find Student Loan Number
When To Use A Personal Loan
Because you can use a personal loan for just about anything, it’s easy to think up reasons to get onebut that doesn’t mean you should. Personal loans can be lifesavers when you need cash to pay for emergencies, such as a dead furnace or a ruptured appendix. If you take out a loan for something more frivolous, you may not qualify for a second loan when disaster strikes.
With that in mind, if your emergency fund and retirement savings are in good shape and your monthly expenses are manageable, funding a once-in-a-lifetime vacation or the bicycle of your dreams, for instance, could be a good use for a personal loan.
Debt Management Plan To Repay Your Debts
If you are serious about eliminating high-interest credit card debt then it is worth your time to call InCharge Debt Solutions and go through a counseling session.
The certified counselors you speak with will let you know immediately if a debt management program is the best solution for your troubles.
In 2019, InCharge clients paid off more than $118 million dollars of debt.
Call InCharge Debt Solutions to speak to a certified credit counselor and see if the debt management program works for you.
Read Also: What Credit Score Is Needed For Usaa Auto Loan
Why Consolidate Debt Into A Home Equity Loan
Home equity is the difference between the value of your home and the remaining mortgage balance. Your home equity increases as you pay off your mortgage and as your home goes up in value.
You can use your home equity to get a loan or line of credit, which, like a debt consolidation mortgage, combines your debts into one payment.
For home equity loans, the lender uses your home as security. Interest rates on equity lines of credit are lower compared to other loans. You get a higher credit limit, which is useful on higher interest loans. On a home equity line of credit , you can get a maximum of 65% of your home’s appraised value. The more equity you have in your home, the more money you can borrow.
Generally, you pay interest on the money you use, not on your total credit limit. Interest rates fluctuate depending on market conditions, so your payments could go up. As long as you pay the minimum payments, you can make multiple payments without penalty. Fees apply, such as appraisals, title search, title insurance and legal fees.
Do your homework. Calculate your home equity and how much you can borrow with our home equity calculator.