The Ins and Outs of Debt Consolidation


There are couple of reasons why anyone would want do debt consolidation. First reason is to minimize the number of bills or in other words manage less number of debt accounts. The second reason is to save money. Lot of times people end of having various debts which include borrowing money for home, car, furniture, health expenses, vacation etc. The reason for borrowing money determines the type of debt. If a person is borrowing money for home, it would result in a debt called mortgage whereas a debt resulted in purchasing a car is synonymous to auto loan. Buying furniture or spending on vacations would mostly go in credit card debt and the debt could be shared by various credit cards at different APRs. Based on the type of loan, APR on it would vary.

If balances are carried on various accounts(credit cards, personal loans, personal line of credits, auto loans, equity loans, HELOC etc) it gets tedious to manage all these accounts and it becomes more likely that a payment will be missed resulting in penalty fees. Debt consolidation should be done in such a way that the resulting payment should be smaller than the sum of the payments made on different accounts before debt consolidation.

Some of the ways people could borrow “cheaper” money or low APR money is via using funds for 401k, refinancing a home, taking a loan on a Car, utilizing 0% balance transfer offers on credit cards, personal loans or lines of credit from the local credit union where they’ve opened a checking account, etc. All the before mentioned ways would offer money in single digit APR if a person has reasonable credit history. However, not all options stated above might suit everyone. People close to retirement should not look at taking a loan against 401k as that may impact adversely during retirement. 0% balance transfer offers usually are good for only 6 – 18 months and after that period, the credit card companies start charging double digit APR’s, so one has to very careful in doing the re-payments to credit card companies on money borrowed using balance transfer options.

Personal loans or line of credits from local credit unions would be beneficial if you are paying higher APR on various debts than what a credit union is offering on personal loans/line of credits. Such loans would have better APRs if the money is borrowed for shorter terms versus longer. As the term increases, the APR the credit union charges goes up. Overall, it makes sense to calculate your existing payments to debts on a monthly basis and compare it with your single payment after debt consolidation. Another aspect that needs attention is the amount of interest paid over a period of time. If the consolidated debt has lower payment than your cumulative payments before consolidation, it may possible that the term has elongated after consolidation which results in more charges as interest but lesser monthly payment. Whether you’re in Melbourne, FL or Seattle Washington, take a calculator and play with the numbers to see if debt consolidation if something you should consider.

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