If you?re heavily in debt, a personal debt consolidation loan might seem like the perfect answer. It will roll all your debts into a monthly payment that?s less than you?re currently paying.
And if the rate of interest on your debt is reduced, more of your cash will go towards repaying the money that you?ve borrowed, which means you?ll be debt free in a shorter period of time.
Great!
But these are certain things to consider before you sign on the dotted line for personal debt consolidation.
1) Is A Personal Debt Consolidation Loan Right For You?
Debt consolidation has helped millions of people to get out of dbet, but it?s still a big step. Don?t enter into these agreements lightly. Treat your personal debt consolidation loan as your last chance. Don?t do it unless you?re prepared to cut your spending, stop borrowing and keep going until your debts are history.
2) How much to borrow?
The best plan is to organise a consolidation loan for as little as possible. So if you owe $15000, then consolidate all your personal debts with one consolidation loan of $15000, and not a cent more!
And whatever happens, beware of lenders who encourage you to borrow more than you already owe. Taking the example above, some unscrupulous lenders will show you how you could borrow $20000 or even $25000 and still pay less every month than you do at present. And many people fall into this trap. As soon as they see the opportunity to ?save? money and get another $10000 on the hip they can?t wait to sign the loan agreement.
But these lenders are just taking advantage of the fact that the debt is given at a lower rate of interest and spread over a longer period of time. In the long run, if you borrow more, you?ll have to repay more. So don?t borrow more than you need.
3) Which Type?
There are two main types of personal debt consolidation loans; secured or unsecured.
Secured Consolidation Loan
These loans are normally secured against your home. So if you don?t keep up with the repayments, your lender will sell off your home to get their money. And becuase the lender is taking less of a risk, the interest rate you pay should be much lower than a normal unsecured personal loan. In fact, the APR rate on your personal loan debts could drop from perhaps 10 or 15% to around 5-6%. That?s quite a saving and will certainly help you to repay your debt in a shorter period of time. Secured consolidation loans can be an extremely powerful tool to remove debt if you owe a large amount of money. But as I said, there is a risk that your property could be reposessed.
Another advantage of secured consolidation loans is that your new lender will normally deal with each of your existing lenders and pay them off in full. That can save you a great amount of time and paperwork.
Secured loans are usually set up to be repaid over a longer period of time, anything from 10-30 years. While this may make the monthly repayments easier to manage, it means that your overall debt will cost you more over the entire term of the loan (even with a lower rate of interest).
Unsecured Consolidation Loans
As you might have guessed, an unsecured loan doesn?t require any security. This means the lender is taking more of a risk that they won?t get their money back. In turn, you shouldn?t expect such a low rate of interest. A typical APR for an unsecured personal loan might might be in the region of 7-10% instead of the 5-6% for secured consolidation loans.
In fact, you may find yourself in the position where the interest on the best unsecured deal might not be much less than your current loans. And after you take the setup fees into account, the potential savings might not amount to much. And as unsecured loans tend to be repaid over a shorter timescale (perhaps 5-10 years), your monthly payments may not drop that much. If you find yourself in that position, it may be best to attempt to get a lower rate from your lender(s).
Unsecured personal debt consolidation loans can be arranged quickly and are a useful option if you don?t own a property. However, they tend to be limited to ?25000/$40000 which may be an issue if your debts are much larger.
4) How To Find A Reputable Lender?
When you choose a consolidation loan, it?s make or break time. A good deal that?s right for you will help you to repay your debts. The wrong deal may drag you deeper into financial trouble. So it?s vital to choose the right consolidation lender for your situation. There?s no shortage of debt consolidation loan providers, but the big question is; How do you find a reputable lender that is right for your situation?
Again, you?ve got two main options.
a) Use a broker. These are people who have experience of the consolidation loan market and will know the lenders in your area. They can negotiate to get the best terms on your behalf and will help you to avoid unscrupulous companies.
They will charge a fee, but in the long run they should help you to save much more on your new loan deal.
b) Use the internet. View different sites to compare offers. Read articles like this to expand your knowledge on the subject. Find contact details and approach various lenders to get an idea of what they can offer.
And before you approach anyone about a consolidation loan, do a bit of research to see what kind of rates and fees different lenders charge for someone with your level of debt and credit rating. That will help you to avoid the sharks and get the best deal available.
Finally, here are a few more steps that will help to ensure that you get the right deal;
a) Improve your credit rting. A better rating = Lower interest rate offers
b) Do a budget and work out how much you can afford to repay each month before you approach a lender. Aim to pay as much as possible to speed up the repayment process and save money on interest.
c) Take the lender?s offer and do the calculations yourself to see if the figures add up.
d) Work out the type of deal that you want (secured/unsecured), the amount you want to borrow, the size of your monthly repayments and stick to it. And don?t borrow more than you need.
by Stuart Laing
Copyright (c) Get Out Of Debt.
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Written By : Stuart Laing
Source: http://www.yodzian.com/html/content/personal-debt-consolidation-24451/
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