OK, so now you want to make all your debt go away. Not a bad thought, but beware. A debt consolidation loan does not mean no debt, and it doesn’t always mean less debt.
Consolidation is one of those “buzz” words that you hear everyday, and some of those debt consolidation companies would have you think that a debt consolidation loan will “set you free”.
A debt consolidation loan can be good for you if you follow these guidelines. Firstly, what is a debt consolidation loan. This where a lender lends you money to pay off your bills. The assumption is that you have a number of outstanding credit card bills and other debts with high interest rates (ie 18%-22%), and with a consolidation loan, you pay off all your lenders with this money, and pay a much lower interest rate on this new loan (ie 9%).
Here are a few warnings and tips. You must do your homework to ensure that the new APR (Annual Percentage Rate) one the loan is truly less than the total of your outstanding debt. Make sure the lender does not charge a large upfront fee that they don’t tell you about.. And also watch out if the lender tries to roll the fee into the loan payments in an attempt to hide it.
Next, you must ensure that you close out all of the accounts that you just paid off with the loan. Otherwise the tendency will be to start using the cards again because they have a zero balance. Then you’ll have 2 debts. One with 22% and the other with 9%, and you’ll be worse shape than before. CLOSE THOSE ACCOUNTS.
Don’t sign a debt consolidation loan unless you know the following:
1)the principal amount you are borrowing
2)what the APR will be
3)how many payments you will make
4)what the closing costs are, if any.
If these things are not spelled out clearly on the contract, or you don’t understand the contract, DON’T SIGN IT. It will come back to haunt you later.
And finally, don’t keep any of the cash that you got from the loan for yourself. Just borrow what you need to pay off your debts.
If you do the above things properly, then your debt consolidation loan will work for you.
