Debt consolidation

Consolidating debt is growing in popularity. The signs of this are everywhere. From television advertisements, to letters in your post box, offers of debt consolidation abound. Debt consolidation is a huge business and the primary reason for new personal loans is debt consolidation.

The offer can be very attractive. You get to pay off all your various high interest debts and instead, you owe one tidy lump sum to one lender at a much better interest rate. Caution is advised however. Often, the payments can last for years, and the debts seem to just stay as they are rather than getting paid off. If this is the case, debts that could have been paid off in months, end up being drawn out over years, with all the interest this entails. Another concern about debt consolidation is the false sense of security it offers. Many people who have been worried about their various debts often feel a huge relief at getting the whole lot transformed into one sum, and feel like they can continue to rack up more debts. Debt consolidation does not, in any sense, mean that the debt has been paid off. It is a fact that many people who consolidate their debts get into more debt once they can afford it again.

Most debt consolidation takes the form of a personal loan repayable at fairly good rates over a number of years. The most common items to be repaid are credit cards, followed by car payments and home improvements. In 2006, over one third of all loans will be for debt consolidation.

When deciding what personal loan to opt for, consumers must do their homework. Rates vary significantly from lender to lender and a slightly lower rate can have a large impact on the total amount repayable. There are many personal loans to choose from these days and rates are very competitive so you should be able to find a loan with a good rate that suits your needs. Many people do not realise that they can take advantage of any bank or lender’s loan offers. They do not have to take a loan from their existing bank. If you see a better rate from another bank or institution, and the rates are good, and you trust the lender, that is the loan you should go for.

Every year, consumers could save over £2,000 on a £10,000 loan simply by opting for the most competitive rates. Many people stick to their bank for personal loans even though the rate is poor. The evidence of this is that the high street banks have over half the market in personal loans while offering generally higher rates than some of the alternatives

Types Of Debt Consolidation Loans

Debt consolidation loans can be either secured or unsecured. A secured loan uses something of significant value to secure the loan amount. The most common source of security for such a loan is your home. Secured loans are less risky for the lender, usually leading to a lower interest rate and larger amounts available for borrowing.

An unsecured loan is not secured against something of significant value, so it is much riskier for the lender. This type of loan usually comes with higher interest rates, smaller amounts available for borrowing, and often includes restrictions on how you can spend the money you receive.
In either case, secured or unsecured, the debt consolidation loans available to you will depend on your credit rating. Those people with poor credit can still access debt consolidation loans, however, and over time can even improve their credit rating by diligently making payments on time and in full.

A secured loan is one that is secured against an asset, usually your home, and these loans can often take longer to process that unsecured loans simply because of the additional information required, such as property valuations and proof of home ownership. However, this type of loan is also the most affordable option for many borrowers and there are a number of factors that can determine how much you will end up repaying on a monthly basis.

You will often find that the interest rates charged on secured loans are very competitive, so you can enjoy real value for money, as lenders can afford to offer lower interest rates because the loan is secured against an asset. You will also find that secured loans are available over a longer term, which can help to keep the monthly repayments down because the overall debt is stretched over a lengthy period. In addition to this, you will also find that your borrowing power is likely to be far higher with a secured loan that with an unsecured loan, and most lenders will base the amount that you can borrow on the available equity in your home, which is the market value of your property minus any mortgage or other loans already secured upon it.

Another great thing about secured loans is that they are suitable for those with a bad credit rating. Providing you are a homeowner, you should be able to find a lender that can provide you with a competitive bad credit loan even if you have a tarnished credit rating, whereas you could find it very difficult or even impossible to get an unsecured loan if you have a poor credit history.
Comparing secured loans is easier than ever these days, as you can simply go online and compare the different loans and rates available. You can then make your decision and even your application online, and in many cases you will receive an instant decision in principle on your loan application.

The advantages and disadvantages

Debt consolidation loans are incredibly popular. The advantages are plain to see:

• Debt consolidation loans help reduce the number of bills and due dates to manage
• Debt consolidation loans may bring double-digit interest rates down to single digits.
• Debt consolidation loans often relieve a budget crunch. By bringing monthly payments down, debt consolidation loans free up cash for current household needs.
• Some options - the cash out refinance and second mortgage types - may bring income tax benefits along with debt consolidation. (Consult your tax advisor for details)
  

Debt consolidation loans carry some risks, and borrowers need to be honest with themselves to avoid being snared.

• Taking on a debt consolidation loan without a corresponding change in budget and spending habits enables many people to plunge even deeper into debt.
• Most debt consolidation loans extend the length of time the borrower has to repay by years. So, even with a lower interest rate and possible tax deductibility, the ultimate cost of borrowing may be higher with a debt consolidation loan.
• Debt consolidation loans can deplete home equity-emptying assets that could be used to handle true emergencies or lowering your standard of living at retirement.
• Credit card balance transfers can be over-used, resulting in a shell game where balances are never reduced, just shifted around. And without consistent, on-time payments, rates can rocket right back to where they were-or higher.

Student loan consolidation

In the United States, federal student loans are consolidated somewhat differently, as federal student loans are guaranteed by the U.S. government. In a federal student loan consolidation, existing loans are purchased and closed by a loan consolidation company or by the Department of Education (depending on what type of federal student loan the borrower holds). Interest rates for the consolidation are based on that year's student loan rate, which is in turn based on the 91-day Treasury bill rate at the last auction in May of each calendar year

Student loan rates can fluctuate from the current low of 4.70% to a maximum of 8.25% for federal Stafford loans, 9% for PLUS loansThe current consolidation program allows students to consolidate once with a private lender, and reconsolidate again only with the Department of Education Upon consolidation, a fixed interest rate is set based on the then-current interest rate. Reconsolidating does not change that rate. If the student combines loans of different types and rates into one new consolidation loan, a weighted average calculation will establish the appropriate rate based on the then-current interest rates of the different loans being consolidated together.

Federal student loan consolidation is often referred to as refinancing, which is incorrect because the loan rates are not changed, merely locked in. Unlike private sector debt consolidation, student loan consolidation does not incur any fees for the borrower; private companies make money on student loan consolidation by reaping subsidies from the federal government.Student loan consolidation can be beneficial to students' credit rating, but it's important to note that not all federal student loan consolidation companies report their loans to all credit bureaus.

Private Loan Consolidations

As a college student, you are constantly dishing out thousands of dollars towards various expenses, including tuition, books, fees, housing, food, cell phone bills, utilities, insurance and car payments. The list could go on forever. And, if you are like many students in America, part of your education is probably funded through private student loans. There has never been a better time to consolidate your private student loans.

Though the cost of schooling can cost thousands, EdFed is here to help you save thousands! This is because EdFed offers competitively, low interest rates and fees with our private student loan consolidations. Also, when you consolidate your private student loans through EdFed, you can save almost 50% off of your monthly bill!

To save even more off of our already low interest rates, you can qualify to receive our borrower benefits. When you sign up to pay with our automated debit program you will receive an immediate 0.25% reduction off of your interest rate.

Three Flexible Repayment Options

When you consolidate your private student loans with EdFed, we offer you three repayment options to choose from, enabling you to choose the one that best meets your financial needs. Your interest rate stays the same, no matter which option you choose, and you have the freedom to change your repayment option at any time, should your situation change. Your payment options include:

• Equal Payments

This is the most common repayment option. In an equal payment repayment plan, both the interest and principal of the consolidation loan will be paid equally for the life of the loan. Your monthly payment will stay constant for the entire repayment period.

• Select 2/ Graduated Payments

The Select 2 repayment option enables you to make interest-only payments for the first two years of repayment. After two years, the payments will increase to include equal installments of both the interest and principal for the remaining term of the loan.

• Select 5/ Graduated Payments

The Select 5 payment option enables you to make interest-only payments for the first two years of repayment. During the third through fifth years of the loan, the payments will increase to include only a portion of the principal with the interest. When you enter the sixth year of your loan repayment, your payments will once again increase, this time to include both the principal and interest equally throughout the remainder of the loan.

Debt Consolidation Programs

Debt consolidation programs are usually just a big loan that pays off other smaller loans. They can be very beneficial to borrowers, but these programs also have their pitfalls.

Debt consolidation programs are good for a few situations. If you are paying several different loans off, your life may be easier if you consolidate everything into one loan. You’ll only get one monthly statement and make one payment.

Also, you’ll find that your monthly debt payments decrease if you use a debt consolidation program that stretches your payments out over a longer period of time. This means that you’ll pay out less each month and you can free up some cash.
A tempting (and sometimes successful) strategy is to use a debt consolidation program to manage various high-rate revolving debts.

Use of Debt Consolidation Programs

Using debt consolidation programs can help you or hurt you. You should be very aware that all these programs do is shift your debt – a debt consolidation program does not eliminate your debt. You owe the money and will have to pay it back sooner or later.
One pitfall of a debt consolidation program is that you may feel like you have less outstanding debt. For example, you’ll notice that your credit cards once again have generous amounts of available credit. If you use this credit you’ll only dig yourself into a deeper hole.
You should also be aware that you may end up paying more total interest if you use a debt consolidation loan. If you stretch out your payments over a longer period of time, it is possible that your total interest cost will be higher. Of course, it may be worth it to you if you can more easily manage your cash flow today.
Finally, remember what you’re risking by using one of these programs. Often, you’ll use a home equity loan or a home equity line of credit to consolidate your debt. The consequences of falling off the payment schedule can include the loss of your home in some cases. Credit card companies can’t take your home. However, if you pledge your home as collateral in a debt consolidation program then your house is fair game for a foreclosure.

Find the Best Debt Consolidation Programs

There are a variety of choices, and you should shop around to find one that fits your needs. If you need some ideas on where to start, try this plan:

1. Local credit unions or banks that you already have a relationship with. These are reliable
sources that are likely to give you a fair deal.
2. Banks that you don’t already have a relationship with. They might offer you a good deal in
order to win your business.
3. Mailers offering debt consolidation programs. These lenders already want your business –
they’ve mailed you an offer because something about you fits into their desired profile. Only
work with a reputable institution that you know you can trust -- some junk mail can get you
into a bad deal.
4. An internet search for “debt consolidation”. Just be careful and be sure you don’t get
scammed.
In addition to shopping around, you can ensure that you get the best deal by managing your credit. Loans are hardest to get when you need them the most.