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Eliminate Your Credit Card Debt, But How?
By Steve Faber, Thu Dec 8th
Can a debt consolidation loan eliminate your credit card debt?A consolidation loan might (or might not) be the key. There areseveral things you must consider when making the choice toconsolidate debt using a debt consolidation loan. First, is a debt consolidation loan your best choice toeliminate or substantially reduce your debt? There are otheroptions available to you, including credit counseling andbankruptcy. Obviously bankruptcy is a last resort. You mustexamine several factors when making your decision on which debtreduction / elimination strategy to use. You need to get information on debt consolidation to make the correctdecision. •How much outstanding debt do you have? •What is the interest rate of your current debt? Many creditcards have interest rates of 14% - 22%, depending upon yourcredit rating and payment history. Obviously, the higher yourcurrent average interest rate, the better off you will be if youconsolidate your debt with a consolidation loan at a much lowerrate.
•How much of your outstanding debt is unsecured? Unsecured debthas no collateral against it. Credit cards, student loans, storecharge cards and medical bills are examples of unsecured debt.If you have over $7,500 in unsecured debt there
a multitude oflenders that you can look at. Student loans fall into adifferent classification from other types of unsecured debt. Inthe United States, most are backed by the federal government.Usually you will have to use a secured debt consolidation loanto pay off your unsecured loans. You may also be able torefinance your secured debts, but you usually cannot consolidatesecured debts. •Do you own a home or other substantial assets to use ascollateral for a debt consolidation loan? If you own a home orother real estate, how much equity do you have in it? •What type of interest rate is available to you for aconsolidation loan? The interest rate you receive on your loanis affected by a multitude of factors including the prime rate.For student loans, the borrower interest rate on consolidationloans is currently calculated as the weighted average of theinterest rates in effect on the loans being consolidated,rounded up to the nearest one-eighth of 1 percent. They arecapped at 8.25 percent. •How is your credit rating? Someone with a very good creditscore has options open to them that those with lesser creditratings do not. Keep in mind that if you have more than 20% equity in your home,you are usually not required to carry private mortgage insurance(PMI). If you have reached the 20% equity stage through eitherpaying down the principal, asset appreciation, or both, you canprobably drop PMI and lower your payment. On the flip side, ifyou are not paying PMI and you take out a consolidation or otherhome equity loan, you may put yourself back under the 20% equitythreshold. This would require you to get a new PMI policy.Factor this in when making your cost / benefit analysis. If you are constantly slipping backward and your cash flow ispoor, you can improve things with a debt consolidation loan. Becareful and weigh your options carefully. Take into account thetax benefits you may receive by using a home equity loan toconsolidate your debt. This benefit will vary depending uponyour tax rate. You can get many free quotes for debtconsolidation loans. There are several places that have multiplelenders compete for your business. Talk to several lenders tosee which will give you the most favorable terms. You cansubstantially lower your monthly payment and significantlyimprove your cash flow situation with a debt consolidation loan.Just make sure this is the right choice for your needs. About the author:Steve writes about a multitude of topics from home theater andautomation to business and finance. See his website, The Debt and Guide for moreinformation.
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