Eliminate Your Credit Card
Debt, But How |
By Steve Faber |
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Can a debt consolidation loan eliminate your credit card debt? A
consolidation loan might (or might not) be the key. There are
several things you must consider when making the choice to
consolidate debt using a debt consolidation loan.
First,
is a debt consolidation loan your best choice to eliminate or
substantially reduce your debt There are other options
available to you, including credit counseling and bankruptcy.
Obviously bankruptcy is a last resort. You must examine several
factors when making your decision on which debt reduction /
elimination strategy to use. You need to get information on debt
consolidation to make the correct decision.
How much
outstanding debt do you have?
What is the interest rate
of your current debt? Many credit cards have interest rates of
14% - 22%, depending upon your credit rating and payment
history. Obviously, the higher your current average interest
rate, the better off you will be if you consolidate your debt
with a consolidation loan at a much lower rate.
How much
of your outstanding debt is unsecured? Unsecured debt has no
collateral against it. Credit cards, student loans, store charge
cards and medical bills are examples of unsecured debt. If you
have over $7,500 in unsecured debt there a multitude of lenders
that you can look at. Student loans fall into a different
classification from other types of unsecured debt. In the United
States, most are backed by the federal government. Usually you
will have to use a secured debt consolidation loan to pay off
your unsecured loans. You may also be able to refinance your
secured debts, but you usually cannot consolidate secured debts.
Do you own a home or other substantial assets to use as
collateral for a debt consolidation loan If you own a home
or other real estate, how much equity do you have in it?
What type of interest rate is available to you for a
consolidation loan? The interest rate you receive on your loan
is affected by a multitude of factors including the prime rate.
For student loans, the borrower interest rate on consolidation
loans is currently calculated as the weighted average of the
interest rates in effect on the loans being consolidated,
rounded up to the nearest one-eighth of 1 percent. They are
capped at 8.25 percent.
How is your credit rating
Someone with a very good credit score has options open to them
that those with lesser credit ratings 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 either paying
down the principal, asset appreciation, or both, you can
probably drop PMI and lower your payment. On the flip side, if
you are not paying PMI and you take out a consolidation or other
home equity loan, you may put yourself back under the 20% equity
threshold. 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 is
poor, you can improve things with a debt consolidation loan. Be
careful and weigh your options carefully. Take into account the
tax benefits you may receive by using a home equity loan to
consolidate your debt. This benefit will vary depending upon
your tax rate. You can get many free quotes for debt
consolidation loans. There are several places that have multiple
lenders compete for your business. Talk to several lenders to
see which will give you the most favorable terms. You can
substantially lower your monthly payment and significantly
improve your cash flow situation with a debt consolidation loan.
Just make sure this is the right choice for your needs. |
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