Loan consolidation is a financing strategy that allows people to consolidate outstanding debts into a low-interest loan. These kinds of loans generally require borrowers to own real estate with accrued home equity which is used to secure financing.
Loan consolidation has been a very popular method because it helps borrowers reduce their debt load. However, it is considerably more difficult to qualify for home equity loans because of declining property value and tightened lending criteria.
One of the first things people should do is obtain copies of credit reports to determine their current FICO score. The simplest way to receive reports from each of the three credit reporting bureaus is to visit AnnualCreditReport.com. This service is offered by TransUnion, Experian and Equifax and complies with the Fair Credit Reporting Act established by the Federal Trade Commission.
Using real estate as collateral to secure financing to pay off unsecured debts is very risky. If property owners become delinquent with debt consolidation loan payments they can place their house at risk for foreclosure, even if they remain current with their first mortgage installments.
It’s important to calculate the actual cost of entering into debt consolidation. Although monthly payments can be reduced, the reality is borrowers end up paying more in the long run. While home equity loans are charged a lower rate of interest, payments extend for several years more than the original unsecured loan. Over time this can amount to thousands of dollar in additional interest.
Another consideration is the cost of obtaining a home equity loan. Borrowers will have to pay for real estate inspections and appraisals, along with legal fees, loan origination costs, and settlement fees. These fees can amount to several thousand dollars that have to be paid upfront.
Prior to applying for debt consolidation loans it can be advantageous to research debt reduction alternatives. Two trustworthy sources are Dave Ramsey and Suze Orman. These experts have published several books and sell personal finance home study courses through bookstores and via their websites.
Another option is to participate in credit counseling. Professional credit counselors are trained to help people eliminate debt and regain control of personal finances. In some instances, credit counseling agencies assist debtors with creditor negotiation to eliminate late fees and penalties and obtain lower interest rates.
At the very least, credit counselors assist debtors with developing a debt reduction plan and teach methods for staying on track with finances through budgeting.
Budgeting is an effective strategy for overcoming debt problems, but does require vigilance. One mistake people often make is paying for basic living expenses with credit cards, but only paying minimal payments. This practice will keep people in financial bondage forever.
To succeed with budgeting demands keeping close watch over expenses. Any time expenses surpass income it is vital to increase income or decrease expenses. The simplest way to know where you’re at is to write down all expenses and earned income.
While people usually can’t decrease their rent or mortgage payments, they can reduce expenses in other areas. Most utility providers let customers enter into budget plans which allow them to pay the same amount each month.
Cable and telephone providers offer basic packages that don’t include expensive premium channels or unlimited long distance. Food costs can be lessened by using manufacturer coupons and taking advantage of buy one get one free sales.
People that need to earn extra income might need to take on a part-time job or engage in bartering to reduce monthly expenses. With a little creativity, people can find ways to improve cash flow or lessen expenses.
Instead of going further into debt with loan consolidation, consider creating a plan to tackle debt with a head-on approach. Start by paying off loans with high interest and the largest balance, then work on paying off smaller loans. Strive to remit payments on time to prevent late fees and avoid causing further damage to credit scores.