Business and Finance

Archive for July, 2008

Getting a home equity loan, or second mortgage, for the sole intent of consolidating and ultimately eliminating unnecessary debts is a great plan. Many consumers are burdened with high credit card balances, consumer loans, etc. Reducing or paying off debts takes time. Furthermore, many do not have the disposable income to lessen credit card balances.

Owning a home places you at a huge advantage. Those who have built equity in their homes may acquire a home equity loan as a way to reduce debts. These loans are affordable, and serve a useful purpose. However, debt consolidation home equity loans have certain risks.

How Do Debt Consolidation Home Equity Loans Work?

The concept of debt consolidation home equity loans is simple. Home equity loans are approved based on your home’s equity. A home’s equity can be calculated by subtracting the amount owed from the home’s market value. Hence, if you owe $50,000 on a home worth $120,000, the equity totals $70,000.

Once the lending institution approves your loan request, and the money received, the funds are used to payoff creditors. Creditors may include high interest credit card balances, consumer loans, automobile loans, student loans, etc. Furthermore, debt consolidation can used to payoff past due utility bills and medical bills.

Debt consolidation loans are not free money. These loans have to be repaid within a reasonable timeframe. On average, home equity loans have short terms of seven, ten, or fifteen years – sometimes less. Because home equity loans have fixed and lower rates, these loans are easier to payoff than credit cards.

Pros and Cons of Debt Consolidation Home Equity Loans

The major advantage of home equity loans is the ability to become debt free. However, home equity loans involve careful planning. Once credit cards and other loan balances are eliminated, closing credit accounts is a smart maneuver. This way, you avoid accumulating additional debts.

Sadly, some consumers repeat past credit mistakes. Along with paying a home equity loan, they acquire more credit card debt, which increasing their debts and payments. Excessive debt makes it difficult or impossible to maintain regular home equity loan payments. This will present another home equity loan danger – inability to repay the loan. A huge disadvantage of debt consolidation home equity loans involves the risk of losing your home. Before accepting a loan, realistically analyze whether you can afford a second mortgage.

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No doubt, every borrower tries to stay away from unnecessary debt burden. How debts can be managed without affecting monthly budget- this is a constant endeavour of all borrowers that always insists them to look for an option. In that case, the option can be easily found through debt management program. And undoubtedly debt consolidation is an important tool of debt management program.

Debt Consolidation process stresses to consolidate all debts into one single debt. In this process, mainly a separated loan is provided to borrowers that covers all the current debts of them. And later borrowers have to pay only on that single debt instead of numerous ones. Thus, by consolidating all debts into one, a borrower can easily manage his all unpaid debts.

But the question is that whether these loans are available at low interest rate or not? If a person wants to consolidate his all debts in secured way, then automatically lender will provide him the loan at lower interest rate, as the presence of his property covers the risk of lending money. But still, at the time of finding a debt consolidation loan at low interest rate, one should keep the following things in his mind…

Collateral choice:

Always remember that your collateral will be prioritized at the time of deciding the loan rate. High valuable collateral will ensure you to avail a debt consolidation loan at a lower interest rate. So cautiously choose collateral. As collateral, home or other real estate property, automobile go well. Besides you can use other valuable objects against the loan amount.

Record of your credit score:

Flawlessly it can be said that as a good scorer, you will get extra edge when the interest rate will be decided. So, be sure about your credit score. Evaluate, whether it is considered as a good score or not.

Shop around for the low rate of interest:

At the same time, do not stick to one lender. Keep your eyes on other lenders and their deals as well. Visit various lending companies, banks, financial institutions in person, ask for their different loans quotes, then carefully compare them and apply for the best deal.

Besides traditional lenders, your searching can be done over the Internet too. Many lenders, these days, are providing debt consolidation loans at relatively lower interest rate. You can easily get all their loan quotes by simply clicking the mouse. Moreover, it will help you to save your valuable time.

Bad credit scorer, like CCJ’s, arrears, defaults even late payment also can apply for low interest debt consolidation loans. Furthermore, due to the increasing competition among the loan lender, a borrower also can avail low interest debt consolidation loans in unsecured form. In that case, a bit search is mandatory.

Debt consolidating is helpful for borrowers in true sense. Not only managing debts properly, but with these loans borrowers can set aside all the untimely and harassing calls of lenders and wave off all debt barricades.

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If you’re deep in debt and having difficulty paying your bills, one of the best sources of debt consolidation advice and help is a credit counseling company. Credit counseling companies can offer you debt consolidation advice including how to use credit lines wisely, helping you to establish a workable budget, and how to keep track of your bills and best manage your money. A trained and certified debt consolidation advice specialist can arrange a repayment plan with all of your creditors and place you on the track to financial security.

Once you have selected a reputable consolidation advice agency, you will be asked to provide information about your income, expenses and debts. The counselor then evaluate the information and discuss your situation with you before making recommendations and offering the most appropriate debt consolidation advice for your situation to help you address your financial problems. Some useful pieces of debt consolidation advice may be participation in an educational class, enrolling in a debt-management/repayment plan. However, the debt consolidation advice may extend to areas other than financial which include referral to another organization, such as a relationship counseling or state employment agency for assistance. After all, the debt consolidation advice service understands that there are many underlying factors that led to your financial difficulties and that these also have an impact on other areas of your life.

You need to spend some time researching your options and take extra care to select a reputable debt consolidation advice agency. Most importantly you should be able to find a debt consolidation advice agency that has satisfied clients, offers personalized service from trained counselors, can educate you how to make appropriate financial choices and will provide you with the tools you need to achieve financial security.

Don’t be tempted to think that just because a debt consolidation advice company has a big advertising campaign means it is the best. Quite often the only reason that a debt consolidation advice service has placed large and numerous adverts in various forms of media it is because they have not got enough clients! You would also be wise to ignore telephone calls or e-mails that arrive out of the blue from debt consolidation advice companies offering their services. The best debt consolidation advice services will often rely on past clients for referrals; they do not need to solicit business through constant television advertising, infomercials and telemarketing or spam e-mails.

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Debt consolidation and debt management go hand in hand. Before you consider any type of bill consolidation loan, you should meet with a reputable debt management counselor. You will learn some valuable financial management principles. You will get a specific road map to a debt free life.

Once you’re committed to applying what you’ve learned, a debt consolidation loan can significantly reduce your financial stress. Those bad debt management practices will become history and so will your debts.

The real key to a debt free life is learning how to best handle your finances. A consolidation loan is only a vehicle to help you accomplish your financial goals. Bill consolidation is simply taking out money from one company or lender and using that money to pay off all your debts. Then, you are only responsible for paying one company and one bill. It sounds easy and it is, if you consistently use good debt management practices.

There are several options available to you for consolidating your debt. Here are three of the more common consolidation loans.

Home Mortgage Loans
As a homeowner, you have three types of home loans that can help free up the cash to pay off your existing bills.

First, you could take out a home refinance loan. Ideally, this type of loan should be used when you can get a lower interest rate than you are currently paying on your home. You are taking out a loan from a second financial institution to pay off your existing home loan.

Make sure that your new lower interest rate is a fixed rate. If it is an adjustable interest rate, your payments may increase. It is much easier to accomplish your financial goals when you have a fixed monthly payment.

One more note on refinancing your home. Be sure to check out the terms of the agreement. Many times a financial institution will lure you in with the promise of a low interest rate. However, they may have closing costs and fees that you must pay to get the loan. If you have to pay large fees to get the loan, you may be worse off refinancing your home. Be aware of all the costs involved, not just the interest rate.

The second type of home loan is called a home equity loan. That’s another name for a second mortgage. It means that you have two payments on your home. A home equity loan usually has a fixed interest rate, which is good. It also has a specific number of years, just like your original home loan. However, it should be a much shorter time.

There are two distinct advantages for a home equity loan. It does have the fixed interest rate and there should be no penalty for paying it off early.

There are also some cautions you should know about a home equity loan. If the amount of money you owe from both your original and second mortgage loan is more than the value of your home, you could have problems. For example, if you decide to sell you house, you may have problems with your lenders. They may not want to work with you because of fear of losing their investment.

However, if you do sell your home, you will likely have a debt left over for which you are responsible. So, if you’re planning on moving soon, don’t think too much about a second mortgage.

Finally, as a homeowner, you can get what is called a home equity line of credit. This is where you use your home as collateral. The financial institution sets up a specific amount of money for you to draw on. It is called a revolving line of credit.

The amount of your monthly payment depends upon the outstanding balance of your loan. At a minimum, you must pay interest each month. However, this is not a good practice. It does nothing to reduce your financial debt. The more you pay down the outstanding balance from your line of credit, the less your payment will be each month.

A typical home equity loan may last 5 years. However, beware. If you close the loan before the time is over, you will pay a penalty. If your balance is zero, you will have no payment of interest or penalty.

So, if you pay off the loan early, simply stop using the money. Resist the temptation to use the money for some other debt. When the original period is over, close out the loan.

If you don’t pay off the loan off before the time is over, the loan normally converts to a variable principle and interest loan. It must then be paid off over a set time, such as five (additional) years.

There is one main concern with any type of debt consolidation mortgage loan. If you fail to make your payments, you loose your home.

Credit Card Consolidation Loan
When you do not own a home, many people use what is called a credit card debt consolidation loan. That’s a big way of saying that you put all your debt from your various credit cards (and other debts) on to just one credit card.

There are three advantages to a credit card consolidation loan. First, there is almost no paper work. There is no big approval process. Second, many companies offer you the first twelve-months with no interest. Third, you will often get a lower interest rate after the first twelve months.

This is a great option, if and only if, you make your payments on time and are able to pay more than the minimum amount required. You should pay as much as possible during the first twelve months. All your money goes to pay off your debt without interest.

Now, here’s the bad news. If you are late on your payment or your payment doesn’t process correctly on time, your twelve months of free interest is over… immediately. Read the fine print. Not only will you loose the free interest, your interest rate will likely be higher than what you were promised after the twelve-month period.

Be very careful. Credit card consolidation can be dangerous to your financial health. You must make payments on time and you must concentrate on paying off as much of your debt as possible. Otherwise, avoid credit card consolidation like the plague.

Borrowing Against Your Retirement Funds
If you have a retirement plan from your company, such as a 401 (k) or 403 (b), you can borrow some money from your retirement fund. You will have to pay a set amount of interest, which is usually quite low. However, you are paying yourself. It is your retirement fund.

The key point to remember is that you are borrowing the funds. You are not withdrawing retirement funds. There are two major problems associated with withdrawing retirement funds. First, you will pay a ten percent penalty. Second, you will have to pay taxes on the amount you withdraw. You don’t want either of these options.

You must realize that if you borrow from your retirement funds, it will immediately reduce the amount of funds accumulating for retirement. If you are younger, you may have time to make up for this loss of prior to retirement.

However, you also need to weigh out the cost of paying a high interest rate for your debt. That will also impact your financial future. If you can quickly pay off the higher interest debts, you may be able to concentrate on increasing your retirement funds and restoring your future financial security.

Be sure to talk with someone in your company about the pros and cons of borrowing from your retirement funds.

I hope you’ve learned about a few options for consolidating your debt. If you work hard on your debt management skills and use a good debt consolidation loan, you can become debt free. It may not be easy, but it is worth it.

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Debt consolidation is supposed to help you get free of debt. By combining a lot of smaller debts into one big loan you can pay the debt off with lower repayments. So how come a lot of people have the same debt load two years later?

Answer is, they treated the symptom, not the cause. Debt consolidation only works if you address the underlying problem, which is that you spend more than you earn. Once you’ve consolidated debt, it can be very difficult to do it again.

The way it’s supposed to work is that a loan pays off your debts, you sweep away all your past mistakes and extravagances, get a grip on your finances and vow to live within your means. This way you never againt have to face the consequences of any more mistakes and extravagances.

But maybe you had just cause for spending too much. Medical bills are the largest cause of bankruptcy in America. If you got sick or had a major accident you’ve got big bills to pay and this can devastate your finances. If this is you, face up to your debt situation before it gets out of control. Your hospital probably has someone on staff to help people in your situation. Find the person with a sympathetic ear and use them. It’s better to ask for help than to prevaricate and suffer alone.

Your aim should be to keep current with all your non-medical bills, but to work out a way of paying your doctor over a longer period of time. If your medical care providers know that they’ll get their money in the end, there is usually a payment plan that you can use. Remember to keep up to date with your household bills: you’ve got to pay your energy bills but the doctors can wait. They can afford it.

Or maybe the reason you’re still in debt is that you still have to pay your student loans but you’re not yet earning enough to live. If you’re young enough to be in this situation but old enough to have graduated, then the answer’s simple. Get a better job, or get a second job, or both. This sounds tough and it is, but life is tough. If you’ll learn how to be in control of your money at an early age, you’ll be learning how to be one of life’s winners.

For those who are in debt but not sick or young, the simple truth still remains. You’re spending more than you earn.

Here’s a way you can help yourself. Get out your wallet, take out the dollar bills and the credit cards and spread them out on the table. See those credit cards? You probably think of them as infinite plastic. You use them over and over to buy what you want. Until they actually are maxed out, they seem infinite. They will always gratify your spending impulses. That is, if you will let them.

See those dollar bills? They can buy the exact same things as the plastic, but when you’ve handed them over, they’ve gone. If you want more of those bills, you’ve got to earn them. Now get the truth into your head that you can only spend up to the value of those dollar bills. Not one cent more. If you can discipline yourself into this frame of mind, you’ll begin to see that you can repay your debt.

And here’s another thing. You can cut up your plastic even while there’s still money to pay on them. Think about it: destroy the cards but keep up your repayments and one by one those debts will disappear.

If you can think of debt consolidation as a last resort, if you can tackle the causes of your debt (not the symptoms) and if you can promise yourself to start afresh, you can be debt-free.

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