Does paying your monthly bills make you lose your appetite? If
you have become accustomed to having little or no money by the
end of every month and are living paycheck to paycheck, you are
in the same position as a growing number of wage earners.
One way to alleviate some of the stress of making multiple debt
payments is to get a Debt Consolidation Loan.
A debt consolidation loan is a loan with a lower interest rate than
your other individual debts, like credit cards. The concept is
simple. You trade in multiple payments for a single monthly
payment with a lower rate of interest. So how do you estimate
the amount you need to borrow to consolidate your debt?
Grab your statements from the debts you want to consolidate.
Add up the payoff balances - this is the amount you need to
borrow. Also note the time it would take to pay them off with the
current payment schedule, and the interest rate you are presently
paying for each debt.
There are three types of loans to consider. You can refinance
your mortgage, you can get a home equity loan, or you can apply
for a personal loan. Each have advantages and disadvantages
to think about.
If you refinance your existing mortgage, or if you get a home
equity loan, the time until you pay off your house may increase.
Also, with both these loans, realize you are putting your home up
as collateral. If you can't make the payments, you could lose
your house. Be certain this is a risk you're willing to take. The
big advantage? You'll receive a tax benefit at the end of the year
from Uncle Sam.
Personal loans are also a possibility for debt consolidation. The
biggest disadvantage is the likelihood of receiving a higher
interest rate than you would with either a home equity loan or a
mortgage refinance. The reason is simple, this type of loan is
unsecured, meaning it is based primarily on your credit score,
with nothing to secure the loan if you forfeit. However, this is
also an advantage as your home is not being used as collateral.
Debt consolidation is an excellent way of reducing overall debt
as well as your outgoing and long-term cost, but there are a few
things you'll want to double check before signing on the dotted
line.
Remember that list you made earlier? Use it as a reference as
you check the specifications of the loans you're considering. Is
the interest rate lower than you are currently paying? Will you pay
the new debt off in an equal or lesser timeframe than you would
if you didn't consolidate? Even if the new loan has a lower
interest rate, if it takes you two additional years to pay off, you still
may end up with more out of your pocket.
The bottom line? Be informed about your debt consolidation
options and decide for yourself which loan best fits your finances
and lifestyle.
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