Debt Consolidation

Debt consolidation is becoming one of the fastest growing and most sought after loan service in the financial industry today.

Overview: Debt Consolidation:

Debt consolidation is a unique form of financing - be it for an individual or business. The goal is to not only simplify your debts but hopefully get them paid down or paid off much faster. However, many financial institutions and banks do not like to provide debt consolidation loans as they feel that if you are able to make your current payment (regardless if it is hurting you in other places) then they can continue to earn the interest and fees outlined with your original loan documentation.

Moreover, most lenders feel that people who have gotten themselves into this position (too much debt) will just run their debt right back up.

Example: You or your business has $50,000 in total debt from 10 different sources and are struggling to meet those minimum payments. Your current minimum payments on that debt $650 per month. A bank agrees to consolidate all your debt into one single loan - reducing your monthly minimum to $450 per month.

Great, you win with the lower payment and the lender wins by earning interest and fees (this is how they make money).

However, after paying off all those other loans - those lenders begin to send you renewals or new offers for more debt products (again, how they make money). But, there is nothing stopping you from taking those new offers and running your debt right back up.

Happens more times then not. Your original $50,000 in debt now becomes $80,000 in debt with payments you cannot make. In the end, you get hurt and all your creditors (even the new one) losses.

Bottom line: Banks and other lenders don't like to make consolidation loans. However, there are still many ways to accomplish a debt consolidation loan.

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Ways To Consolidate:

The surest and most beneficial means of consolidating debt is to "take out" current lenders with a new, single loan facility. Thus, current lenders get paid off - per the terms of the loan agreement - and therefore cannot seek to mar your personal credit or seek to collect from pleaded collateral like personal guarantees or business assets.

Know that most loan documents - even unsecured loans and credit cards have personal guarantees hidden in the fine print.

Why is taking out a new, single loan better than trying to get your current interest rate or principal level reduced?

If a borrower attempts in any way to modify the terms of the original agreement - thus reducing the interest and fees the bank expects to collect, they will treat those actions very similar to one filing for bankruptcy and work to adversely report those actions on your credit history.

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Getting Approved:

The best method of getting your consolidation loan approved is to not seek a consolidation loan. As stated earlier, most banks and lenders run from the mention of a consolidation loan.

Your best option is to seek out a personal term loan to take out all your other debt or use personal or business assets (assets you already own or have equity in - as secured means easier approval and lower interest rates) to secure a term loan.

The reason this should be a term loan is that term loans start at a set amount and can only go down - unlike credit cards that you charge right back up. This works to reduce your principal and over all interest and well as helps you better control your debt.

The main key in getting approved is demonstrating to your lender you will not run out and run up your debt again. Thus, you should have a good story as well as a good plan to show how you will get your debt under control.

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Benefits:

The following are some of the most cited reasons (benefits) of consolidating your debt:

One, Single Payment - Much easier to manage your overall debt - not having to worry about multiple payments, multiple deadlines or multiple interest rates and fees - when you only have one payment, one lender, one contract.

Paying Your Debt Off Earlier - A consolidated loan, in most cases come with a lower (on average) interest rate, allowing more of your money to go towards principal reduction and interest and/or fees. Or, let's say that your total principal payments (let's forget about the interest portion right now) is $600 per month. With the new loan, your principal payments drops to $500 a month.

Further, let's say that you were making the $600 principal payments - it was hard but you were doing it. Now, if you continue to do that (make the $600 payment towards principal) and you have a lower interest rate, in the long-run you will shave months if not years off your debt. Why? Because with the lower interest rate, your balance will not rise in between payments as quickly - allowing for quicker principal reduction (further reducing the amount of interest you pay in total).

Peace Of Mind - Struggling to make minimum payments on your debt and watching it continue to rise even as you make those payments can add undue stress to your life - effecting you personally and professionally. Getting your debt under control can go a long way to alleviating that stress and bring you some peace.

Further, taking control can mean that in the near future when a new opportunity arises you can qualify for additional debt - debt that provides an overall benefit to you - like growing your business, starting a family, buying a house - all things that go to improving your life.

Stopping Collection Calls - Just getting them to stop calling and no longer being afraid of your phone when it rings is benefit enough by itself. Or, not having collections agencies trying to garnish your wages or putting liens on your business can really improve your relationship with your employer, employees, customers and or suppliers.

Lower Interest Rate - As already stated, lowering interest payments not only frees up more money to be used to reduce your principal balances but can free up cash flow for other needs in your life or business.

Additionally, unsecured loans - like credit cards - tend to have very high interest rates to start with and only skyrocket when you get behind on payments. By consolidating you debt into a single, fixed term loan, you can significantly reduce your overall interest rates. Image you are paying, on average 25% on your credit cards. You take a single term loan for three years at an 18% - which is still high - but, the 7% reduction in interest over that time equates into tremendous savings - savings that can be used to pay down you outstanding debt even quicker.

Do know that you can reduce your own interest rate by add principal each month. While your rate may not change - the amount you pay in interest over the life of a loan or on your credit cards can shrink significantly. To see how adding principal can lower you overall interest, check out this free payment calculator:

Credit Score - Not missing payments, not being late on payments and bringing down your total outstanding balances compared to your available credit can go a long way in improving your credit. We live in a world that your word no longer matters - your credit does - in getting other loans, getting a job, car insurance, life insurance, etc is all based on your credit. Improve your credit score and you can significantly improve your life.

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