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Information on Debt Consolidation Options that Don't Require Collateral
Thursday, Sep 3, 2009
Question: I have about $20,000 in unsecured debt. I make almost $60,000 a year, am single, and only pay $550 a month in rent. I am never late on credit card payments, but since I have to pay so much interest to so many different ones, I'm getting no where with them and am left with very little disposable income at the end of the month. What's the best way to consolidate my debt with no collateral?
Answer: Debt consolidation comes in many forms, so it is important that each consumer reflects on what their needs and concerns and financial situation is before signing up for an online debt consolidation program. The four primary concerns for most consumers are: i) monthly payment, ii) time to debt freedom, iii) total cost, and iv) the credit rating impact of the consolidation program. Be sure to evaluate each program, relative to your prioritization of these factors.Since there are a variety of debt consolidation options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, and other debt resolution options, it is important to fully understand each option and then pick the solution that is right for you.
Credit Counseling
Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering online credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. It is important to understand that in a credit counseling program, you are still repaying 100% of your debts, but with lower monthly payments. On average, most online credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan DOES show up on your credit report and, unfortunately, many lenders look at enrollment
in credit counseling akin to filing for Chapter 13 Bankruptcy or using a third party to re-organize your debts.
Debt Settlement
Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of online debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.
Personal Loan
If you don’t own a home, but you have good credit, you could apply for a personal loan that will pay off all your credit cards. You would then only have one bill to pay every month.
Keep in mind that personal loans often have much higher interest rates than home equity loans and aren’t tax deductible. If your credit is good enough that you qualify for a personal loan, you may be able to receive the same interest rate by calling your credit card companies and asking. Although you won’t reduce the number of bills you receive, you also won’t have to pay any loan origination fees or prepayment penalties.
If you opt for a personal loan, review the terms carefully when you’re approved. Although the offer in the mail may list a low rate, the rate you qualify for could be substantially
Debt Settlement
Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of online debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.
Personal Loan
If you don’t own a home, but you have good credit, you could apply for a personal loan that will pay off all your credit cards. You would then only have one bill to pay every month.
Keep in mind that personal loans often have much higher interest rates than home equity loans and aren’t tax deductible. If your credit is good enough that you qualify for a personal loan, you may be able to receive the same interest rate by calling your credit card companies and asking. Although you won’t reduce the number of bills you receive, you also won’t have to pay any loan origination fees or prepayment penalties.
If you opt for a personal loan, review the terms carefully when you’re approved. Although the offer in the mail may list a low rate, the rate you qualify for could be substantially
higher. Compare the costs of the actual interest rate and the lowest rate your cards are willing to offer before you accept the loan.
Credit Card Balance Transfer
You may actually get the lowest rate by taking advantage of a credit card balance transfer. With good credit, you may qualify for a credit limit that equals the total amount of your debt. You can then transfer all of your debts to one card and pay it off more quickly.
To save the most money, look for a card with 0% interest for at least 12 months and a cap on balance transfer fees. Most transfer fees are 3-4% of the transferred balance. If your balance is $10,000, that fee could be $400. Look for an offer with a cap of $75 at most. If you have several balances to transfer, that cap applies to each individual transfer, not the total, so you could pay more than $75 for all of your transfers combined. A few cards don’t charge transfer fees, but you must have excellent credit to qualify for those cards.
Before completing the transfer, calculate the interest you expect to pay on your current cards and compare that amount with the combined cost of transfer fees and the interest rate on the new card. You may find that the costs balance out.
If credit card consolidation will save money, then it’s worth it, but don’t consolidate simply to reduce the total number of bills if it won’t reduce your interest rate or the cost of the debt.
Good budgeting can often go a long way towards helping one get on the road to better financial health. Check out http://www.bills.com/guide/ to learn more about household budgeting and to download a free Bills.com budget guide.
I hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com/blog/
Credit Card Balance Transfer
You may actually get the lowest rate by taking advantage of a credit card balance transfer. With good credit, you may qualify for a credit limit that equals the total amount of your debt. You can then transfer all of your debts to one card and pay it off more quickly.
To save the most money, look for a card with 0% interest for at least 12 months and a cap on balance transfer fees. Most transfer fees are 3-4% of the transferred balance. If your balance is $10,000, that fee could be $400. Look for an offer with a cap of $75 at most. If you have several balances to transfer, that cap applies to each individual transfer, not the total, so you could pay more than $75 for all of your transfers combined. A few cards don’t charge transfer fees, but you must have excellent credit to qualify for those cards.
Before completing the transfer, calculate the interest you expect to pay on your current cards and compare that amount with the combined cost of transfer fees and the interest rate on the new card. You may find that the costs balance out.
If credit card consolidation will save money, then it’s worth it, but don’t consolidate simply to reduce the total number of bills if it won’t reduce your interest rate or the cost of the debt.
Good budgeting can often go a long way towards helping one get on the road to better financial health. Check out http://www.bills.com/guide/ to learn more about household budgeting and to download a free Bills.com budget guide.
I hope that the information I have provided helps you Find. Learn. Save.
Best,
Bill
www.bills.com/blog/
Also, make sure to get a free financial health check-up with Bills IQ!
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1. Posted by Johhny Apolocada on Monday 7th September 2009 09:57
Thanks for the debt advice.
2. Posted by Bill on Monday 7th September 2009 18:21
Thank you Mr. A. Keep checking in, and be sure to contribute to other debt blogs at bills.com. Bill