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Bill Consolidation Loan
Is a Bill
Consolidation Loan
Right for You?
Regardless of why you have
accumulated a lot of debt, a
bill consolidation loan may or
may not be in your best
interest. It is often referred
to as a debt consolidation loan.
The primary objective of this
type of a loan is to take all
your current bills and lump them
into one payment.
Ideally, you want to lower your
monthly bill and interest rate.
On the surface, it sounds like a
great idea. However, before you
rush to sign up, there are
several pros and cons you should
review.
Five Types of Bill Consolidation
Loans
You can consolidate your debt in
a number of ways. Each has its
pros and cons. Five of the most
common methods to consolidate
debt are:
-
Credit Card
Debt Consolidation
Pros: One of the
easiest ways to consolidate
your bills is to put them
all onto one credit card.
Credit cards are generally
easy to obtain and require
no collateral. In many
instances, credit card
companies will wave the
interest payment for the
first year. This allows all
of your payment to be
applied to the debt.
Cons: After the first
year, your interest rate
will usually be a minimum of
10 to 12 percent. At this
point, a large part of your
payment will be interest. If
you fail to make a payment
on time, you will be charged
a late fee. This will
significantly add to your
debt. After two late
payments, your credit scores
will be reduced… and your
interest rate will increase
by as much as ten percent or
more!
Unless you are very good at
budgeting and disciplined in
paying, think twice before
using a credit card to
consolidate your bills.
-
Debt Consolidation Mortgage
Loan: Home Equity
Loans
Pros:
If you own a home, you can
borrow money using your
house as collateral. The
interest rates are much
lower than using a credit
card. In many cases, they
may be one-third the
interest rate.
Cons: The major
problem here is if you
default on your payment, you
will lose your home. Also,
be aware of fees or points
you may have to pay to get
the home equity loan. If you
have too much setup cost,
keep looking.
-
Debt Consolidation Mortgage
Loan: Home
Refinance Loans
Pros:
A home refinance loan can
free up some of the equity
in your home to help pay off
your debts. This is
especially helpful if your
other bills are high
interest debts. Your monthly
bills could be significantly
reduced. For example, if you
get a home refinance loan
for 6% and you’re paying off
credit cards with a 20%
interest, it’s a no brainer.
Just be sure to shop around.
Cons: Be sure to read
the fine print. Sometimes
you will see a great rate
advertised. However, upon
close inspection, you may be
charged a large setup fee or
points. This could negate
the benefit. If you do not
have much equity in your
home, you need to be very
careful. If you get a
refinance loan, you may owe
more than the house is
worth. If you try to sell
it, you will lose money. If
the real estate value
depreciates, you could lose
money. It’s best to have a
longer-term payment period
in mind when considering
this option.
-
Debt Management
Counseling
Pros:
A good
credit counseling agent’s
objective is to help you get
out of debt. They do not
normally consolidate your
bills. They normally work
out a plan with your
creditors to help you pay
your bills. Usually this
includes a reduction in the
interest rate. You pay the
counseling agent a single
payment. Then, the agency
pays your bills. Using a
credit counseling agency
normally will not affect
your credit rating. You
should be able to pay off
your bills in three to six
years.
Cons: If the credit
counseling agency pays your
bills late, your credit
rating will be hurt. You
will also be responsible for
any additional fees because
you are legally responsible.
If the credit agency charges
a monthly fee, do the math
to see if you’re really
saving money. Be sure to
shop around for a good
credit counselor.
-
Retirement
Loans
Pros:
If you have a
401(k), 403(b) or company
pension plan, it may be
possible to borrow from your
retirement funds. There is
no pre-qualification process
or credit check to endure.
Your interest rate will
normally be quite low.
Note: You cannot borrow from
your IRA retirement funds.
Cons: Remember, you are
borrowing against your
retirement funds. If you
withdraw your retirement
loans, you will be subject
to a 10% penalty plus you
will pay taxes. In addition,
if you leave or lose your
job, you may be subject to
an immediate retirement loan
payback. Otherwise, you will
pay taxes and penalties for
early withdrawal.
If
you need to resolve your debt
problems, one of these five debt
consolidation loan options will
normally work. Realistically you
should have a specific plan that
will pay off your debts within
three to five years. So, if
you’re serious about getting out
of debt, choose the best type of
bill consolidation loan for you
and get started today.
Editors Choice:
Lending Tree
Mortgage Refinance Loan
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