I’ve written a lot about debt consolidation in the last several weeks because it’s a topic on a lot of peoples minds.  Some are hesitant to proceed because there is so much negative press around these loans.  To be fair there are many predatory companies ready to take your money and offer you nothing, to avoid these potential errors read these 4 things to avoid.

 

1. Insanely High Interest Rates

The appeal of debt consolidation is that you basically turn a whole host of different debts and combine them into one simple monthly payment. Than means you’re trading several payments, different due dates, and a selection of interest rates for a single monthly payment that’s often less than your original payments.  If you have debts you can use our debt consolidation tool here.

A lower monthly payment isn’t the whole story, though. You’ll want to keep your new interest rate in mind because it may all equal out to you paying more, not less. Always ask for your interest rate before signing up for debt consolidation, and make sure you check if the interest rate is fixed. The average APR for a debt consolidation loan is 19 percent. Anything significantly higher than that is a bad deal. And keep in mind that your credit score does have an effect on the interest rate you qualify for.

2.   Fees

Debt consolidation is a business, not a free service, so there will be fees, you can get an idea of what the fees are by asking here. You’ll likely be charged a percentage of your total debt and there may also be a monthly consultation fee on top of that. Good debt consolidation companies offer reasonable fees, but some firms take the opportunity to soak their clients with especially high fees. These fees might manifest as monthly payments or upfront charges.

It make take some math on your part, but be sure you figure out if your debt consolidation will still be saving you money after all the fees are done and paid for.

3.   Good vs Bad Debt

No debt is truly good, because no one enjoys owing money, but knowing the difference between good and bad debt is important. Debt with low interest rates, like auto loans, for example, is a good form of debt. Anything with a high interest rate is “bad” debt. Credit cards – one of the most commonly consolidated debts – is usually considered a high-interest “bad” debt.

Consolidating debt is not a zero sum game, meaning you can choose to leave some debts separate from your consolidation if it’s to your benefit. Again, you may have to crunch some numbers here, but be sure you are consolidating the debt with the highest interest rates so you can get the largest benefit from your consolidation. It’s completely acceptable to pay off low interest debt on your own, separate from the consolidation. If you are unsure of which debts would be wisest to consolidate, consider speaking with a credit counseling service.

4. Landing Yourself in Debt Again

Debt consolidation, even when you get the best deal possible, is not a magic cure for your financial problems. A substantial change in your spending habits is usually necessary to avoid falling back into debt, a trend which is upsettingly common.

As you make your way through your debt consolidation, it will be to you benefit to take the time to determine why you accrued so much debt to begin with. People usually run up debt for two reasons: uncontrollable circumstances such as emergencies or medical issues, or poor spending habits. If your debt is a result of poor financial choices, then it’s time to identify and fix them on your own.

Think, do you spend money when your stressed or sad? Do you have trouble saying no to people who ask you for loans? Even if you clear yourself of debt through a consolidation, you might still be at risk of running up huge debts again and end up right back where you started in debt.

The Difference Between Debt Consolidation Loans and Mortgage Consolidation

Most of this article was catered towards debt consolidation companies, there is an alternative and that is using your real estate equity.  Instead of cashing in on a debt consolidation loan with a rate of 8-15%, you can utilize the lowest interest rate you have, which is your mortgage.   Mortgage rates are always lower because they are extended over a long period of time and a lien on real property.  It is because of this that companies will offer lower rates, because the risk is lower than a loan tied to nothing but your word.

 

If you would like to discuss the idea of using your houses equity to consolidate other high interest debt, please feel free to contact me here or via the information below.

 

 

  www.mortgagegreenbaywi.com

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 Justin Scott

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