May 7, 2012

Loan Consolidation

When is Loan Consolidation a Good Idea?

Do you feel that you’re drowning in debt? In some cases, individuals with a large amount of high-interest debt may see a benefit from a debt consolidation loan. Usually a debt consolidation loan is a single, lower-interest loan used to to pay off your other, higher-interest loans. This allows you to make only one monthly payment, pay off what you owe more quickly and take advantage of a lower interest rate.

Debt consolidation isn’t a free pass though. It takes the willpower to follow through on paying off current debt and changing your spending habits.

1.     Calculate your debt load by listing of all of your current debts (excluding your mortgage) and determine what you owe in total. For discussion purposes today, let’s say it’s $20,000.

2.     Next add up the monthly payments you’re making on these accounts. (For credit cards this can vary. Use an average of your last several payments.) Again, let’s use a figure just for our discussion and say your monthly payments total $1100.00.

3.     Seek the best loan for consolidating your debt. Usually this means looking at one of the following:

  •  Home equity loans & lines of credit can offer lower interest rates and, because they’re a type of mortgage, the interest you pay may be tax-deductible.
  • Cash-out refinancing is taking out a new mortgage on your home that’s larger than your current one. For example, if you have a $100,000 mortgage and your house is worth $200,000, you could take out a new mortgage for $120,000 and use the extra $20,000 to pay off your credit cards or higher-interest auto loan. Even if your monthly mortgage payment increases your total monthly payments (current mortgage payment plus the $1100.00 we mentioned above) will decrease and you’ll pay much less interest in the long run.
  • A personal loan offers interest rates that can be higher than a home equity loan, but usually lower than credit cards.

When comparing loans, don’t forget to include upfront fees and points as well as the interest rate and use each loan’s annual percentage rate (APR) for comparison purposes.

Make a plan and stick to it!
Look at the time it will take you to pay off your debt. Home equity loans and personal loans have a fixed term, so you’ll know exactly how long you will be paying.

If you’ve decided to consolidate with a home equity line of credit you’ll be making a small minimum payment every month—but this will not usually reduce your debt. In this case, determine how much you can afford each month on top of the minimum payment. Setting up automatic payments can help you keep on track.

Controlling spending is key.
This final step is key… Debt consolidation only works if you change your spending and don’t incur significant debt again. If you don’t change your habits you’ll end up in trouble again in a short while.

There are numerous companies that offer loan consolidation services for a FEE. Make a smart choice if you decide consolidation is your best alternative—contact your local Bank of Luxemburg for advice and assistance you can trust!


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