The Perfect Way to Manage Your Debt
Debt consolidation and debt management go hand in hand. Before you
consider any type of bill consolidation loan, you should meet with a
reputable debt management counselor. You will learn some valuable
financial management principles. You will get a specific road map to a
debt free life.
Once you’re committed to applying what you’ve learned, a debt
consolidation loan can significantly reduce your financial stress. Those
bad debt management practices will become history and so will your debts.
The real key to a debt free life is learning how to best handle your
finances. A consolidation loan is only a vehicle to help you accomplish
your financial goals. Bill consolidation is simply taking out money from
one company or lender and using that money to pay off all your debts.
Then, you are only responsible for paying one company and one bill. It
sounds easy and it is, if you consistently use good debt management
practices.
There are several options available to you for consolidating your debt.
Here are three of the more common consolidation loans.
Home Mortgage Loans
As a homeowner, you have three types of home loans that can help free up
the cash to pay off your existing bills.
First, you could take out a home refinance loan. Ideally, this type of
loan should be used when you can get a lower interest rate than you are
currently paying on your home. You are taking out a loan from a second
financial institution to pay off your existing home loan.
Make sure that your new lower interest rate is a fixed rate. If it is an
adjustable interest rate, your payments may increase. It is much easier
to accomplish your financial goals when you have a fixed monthly payment.
One more note on refinancing your home. Be sure to check out the terms of
the agreement. Many times a financial institution will lure you in with
the promise of a low interest rate. However, they may have closing costs
and fees that you must pay to get the loan. If you have to pay large fees
to get the loan, you may be worse off refinancing your home. Be aware of
all the costs involved, not just the interest rate.
The second type of home loan is called a home equity loan. That’s another
name for a second mortgage. It means that you have two payments on your
home. A home equity loan usually has a fixed interest rate, which is
good. It also has a specific number of years, just like your original
home loan. However, it should be a much shorter time.
There are two distinct advantages for a home equity loan. It does have
the fixed interest rate and there should be no penalty for paying it off
early.
There are also some cautions you should know about a home equity loan. If
the amount of money you owe from both your original and second mortgage
loan is more than the value of your home, you could have problems. For
example, if you decide to sell you house, you may have problems with your
lenders. They may not want to work with you because of fear of losing
their investment.
However, if you do sell your home, you will likely have a debt left over
for which you are responsible. So, if you’re planning on moving soon,
don’t think too much about a second mortgage.
Finally, as a homeowner, you can get what is called a home equity line of
credit. This is where you use your home as collateral. The financial
institution sets up a specific amount of money for you to draw on. It is
called a revolving line of credit.
The amount of your monthly payment depends upon the outstanding balance
of your loan. At a minimum, you must pay interest each month. However,
this is not a good practice. It does nothing to reduce your financial
debt. The more you pay down the outstanding balance from your line of
credit, the less your payment will be each month.
A typical home equity loan may last 5 years. However, beware. If you
close the loan before the time is over, you will pay a penalty. If your
balance is zero, you will have no payment of interest or penalty.
So, if you pay off the loan early, simply stop using the money. Resist
the temptation to use the money for some other debt. When the original
period is over, close out the loan.
If you don’t pay off the loan off before the time is over, the loan
normally converts to a variable principle and interest loan. It must then
be paid off over a set time, such as five (additional) years.
There is one main concern with any type of debt consolidation mortgage
loan. If you fail to make your payments, you loose your home.
Credit Card Consolidation Loan
When you do not own a home, many people use what is called a credit card
debt consolidation loan. That’s a big way of saying that you put all your
debt from your various credit cards (and other debts) on to just one
credit card.
There are three advantages to a credit card consolidation loan. First,
there is almost no paper work. There is no big approval process. Second,
many companies offer you the first twelve-months with no interest. Third,
you will often get a lower interest rate after the first twelve months.
This is a great option, if and only if, you make your payments on time
and are able to pay more than the minimum amount required. You should pay
as much as possible during the first twelve months. All your money goes
to pay off your debt without interest.
Now, here’s the bad news. If you are late on your payment or your payment
doesn’t process correctly on time, your twelve months of free interest is
over… immediately. Read the fine print. Not only will you loose the free
interest, your interest rate will likely be higher than what you were
promised after the twelve-month period.
Be very careful. Credit card consolidation can be dangerous to your
financial health. You must make payments on time and you must concentrate
on paying off as much of your debt as possible. Otherwise, avoid credit
card consolidation like the plague.
Borrowing Against Your Retirement Funds
If you have a retirement plan from your company, such as a 401 (k) or 403
(b), you can borrow some money from your retirement fund. You will have
to pay a set amount of interest, which is usually quite low. However, you
are paying yourself. It is your retirement fund.
The key point to remember is that you are borrowing the funds. You are
not withdrawing retirement funds. There are two major problems associated
with withdrawing retirement funds. First, you will pay a ten percent
penalty. Second, you will have to pay taxes on the amount you withdraw.
You don’t want either of these options.
You must realize that if you borrow from your retirement funds, it will
immediately reduce the amount of funds accumulating for retirement. If
you are younger, you may have time to make up for this loss of prior to
retirement.
However, you also need to weigh out the cost of paying a high interest
rate for your debt. That will also impact your financial future. If you
can quickly pay off the higher interest debts, you may be able to
concentrate on increasing your retirement funds and restoring your future
financial security.
Be sure to talk with someone in your company about the pros and cons of
borrowing from your retirement funds.
I hope you’ve learned about a few options for consolidating your debt. If
you work hard on your debt management skills and use a good debt
consolidation loan, you can become debt free. It may not be easy, but it
is worth it.