|Our afflictions are designed not to break us but to bend us toward the eternal and the holy. - Barbara Johnson|
Credit Card Debt Consolidation Loan. Other Loan Consolidation.
Sometimes a loan consolidation is the best way to get rid of credit card debt or other types of debt. Don't just jump in and apply for a loan without considering the different options and the ramifications of each of them. Consider these options.
Refinance Home Loan
One option for those with equity in their home is refinancing your mortgage for more than you owe and using the extra cash to pay off debt. You can get pretty low interest rates this way - usually, but not always, lower than the interest rate on a home equity loan. However, when you are stretching out payments over 15 or 30 years, the total cost of the interest over the 30 years on a refinance mortgage can wind up being quite a bit. Be sure to do your homework.
Home Equity Loan
Two advantages of taking out a home loan are that they have fairly low interest rates and the interest you do pay is tax deductible. With a typical (normally no more than 80% of the equity in your home), you borrow money against the equity and repay it over a fixed term. Be aware, however, that a home equity loan requires you to use your home as collateral for the loan. In other words, if you cannot make your payments, your lender can foreclose on your home. Also, you may have to pay closing costs, points or other fees to get the loan.
Cash-Out vs. Home Equity Loan
The difference between a cash-out refinance and a home equity loan is that a cash-out refinancing is a replacement of your first mortgage. A home equity loan is a separate loan in addition to your first mortgage. Also, the interest rate on a cash-out refinance is normally, but not always, lower than the interest rate on a home equity loan.
One more difference is that with a cash-out refinance, you have to pay closing costs. You don't pay closing costs for a home equity loan. Closing costs can add up to hundreds or thousands of dollars.
It makes no sense to refinance a higher amount at a higher rate if your current mortgage is at a lower interest rate. In that case, it's probably better to get a home equity loan.
A secured loan means that the loan is backed up with collateral. Collateral can be your house, your car, your property, etc. If you fail to make the necessary payments, the assets you used as collateral can be seized and sold. The money raised by selling the assets will be used to repay the loan. The advantage of a secured loan is that they often have lower interest rates than unsecured loans.
An unsecured loan is one that is not backed by collateral. It is also known as a signature loan or personal loan. It is supported only by your creditworthiness. If you have reasonably undamaged credit, you may qualify for an unsecured loan. If you choose an unsecured loan, we recommended that you borrow as little as possible. The major disadvantage of an unsecured loan is the cost of interest.
Typically credit unions offer lower interest rates than banks, but even there you can expect a rate of 11% or more. Nonetheless, that may be a whole lot less than the 20% or more you're now paying to the credit-card company.
Sometimes a creditor will suggest you refinance your loan if you are in default. This is certainly an option. Sometimes it can be a good thing and sometimes it can turn out to be a disaster. Think of it this way – This is a new loan with new terms and conditions and you need to consider all the facts.
Do not refinance if you have a valid legal reason for not paying the particular debt. And, whatever you do, do not agree to a proposal to refinance your loan without getting professional advice from an accountant, lawyer or financial adviser.
For all Loans - Request a Disclosure Statement
Request a disclosure statement in advance, so you can walk away and shop around for another loan that may be better. There are certain things to look for on the disclosure statement. The key features are:
Annual Percentage Rate
This is your interest rate. Your interest rate will vary depending on your credit score. Get a free credit report.
This is the total of the interest payments over the life of the loan.
This is the total amount of money you will walk away with – also known as “principal amount.” Always ask for a detailed breakdown of the amount financed. This will tell you the amounts that will go toward paying for insurance or other fees and charges. That money will not go towards paying off your loan and some items may not be necessary. Ask for details on what items are discretionary.
This will show you the length of the loan and whether there is a balloon payment at the end.
You can then decide whether you want to make fewer but larger monthly payments or make a greater number of monthly payments at a smaller amount. Don't be tricked into an agreement which requires a significantly large payment at the end of the loan (balloon payment) which you may not want or can not afford.
This is usually an overpriced "extra." Things like credit life insurance or credit accident and health insurance rarely are worth the cost and not necessary to get the loan.
The contract may make you pay a penalty if you pay off a loan before the term is supposed to end. If there is a prepayment penalty, ask what the terms are. While you’re at it, check to see if you have a prepayment penalty on your original debt if you want to refinance it.
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