Loan and Debt Consolidation
WITH MORE AND more Americans in financial trouble, financial institutions are offering debt consolidation loans as a way out, but are these a good idea?
A debt consolidation loan is a single loan, such as a home equity loan or the refinancing of an existing loan, used to pay off multiple debts such as credit card bills, bills for medical care, signature loans and debts for other types of services. Debt consolidation loans often offer a lower monthly payment, but with a longer term to pay off the loan. This means you may be paying more in interest in the long run.
Be cautious of debt consolidation plans. These plans are not always the best option for your overall financial health. The consolidators may promise to lower your monthly payments; however, this action will extend the length of time it will take to pay off all your debts and ultimately you may pay more in finance charges. Make sure that you are with a reputable credit counseling agency before you enter into any debt consolidation plans.
With promises of debt consolidation, easy payment plans, and quick, easy application and approvals, predatory lenders prey on unsophisticated consumers, focusing especially on those with a lot of equity in their homes. Often, predatory lenders wrap the borrower's existing mortgage into debt consolidation loans, jeopardizing the borrower's equity and the home itself.
Borrowing on Your Home to Pay Bills
If you can't pay most consumer debts, you might receive a bad credit rating, be sued, or even be forced into bankruptcy. But if you can't pay your home loan, you could lose your home.
Many consumer debts such as bills for credit cards or medical services are unsecured. Other consumer debts like car payments or furniture payments may be secured by an interest in the goods but not by an interest in your home.
If you can't repay consumer debts like car, medical or credit card bills, the creditor may be able to take back the goods and sue you for the amount of the debt not repaid by the resale of the goods. And on a consumer debt, the creditor cannot simply foreclose on your home.
A home loan is different from other consumer debts. The new debt is secured by your home. Be careful about using a home loan to consolidate debts into a single monthly payment. This creates the risk that you could lose your home if you can't make the payments.
Questions to Ask About Debt Consolidation
Are your debts unsecured (such as medical bills and credit card bills) or secured only by an interest in personal property (such as a car or furniture payments)?
Can you work out a payment schedule with your creditors to repay existing debts?
How will you pay off a new home loan if you can't pay your current bills?
Credit Counseling Services
If your financial difficulties arise from too much debt or an inability to repay your debts, a non-profit credit counseling service may be able to help. A credit counseling agency may work out a debt repayment plan for you. Credit counseling services are provided by organizations designed to help persons with debt problems pay their bills. In these plans, you deposit money each month with the credit counseling agency. Your deposits are used to pay your creditors according to a payment schedule the counselor develops with you.
Credit counseling professionals can help you create and use a financial plan. If your income is not sufficient to pay all your debts, they can help you work out a debt repayment plan. With this plan, you deposit money each pay period with the credit counseling service and they pay your bills according to your debt repayment plan. They may also require that you not use any additional credit until you have repaid your present debts, unless approved by your credit counselor.
Keep an eye on the agency if you sign up for a debt management plan, don't stop paying your bills until the plan has been approved by your creditors. Make sure that the agency's payments schedule allows your debts to be paid before they are due each month. Call each of your creditors the first month to make sure they have been paid on time by the agency.
A debt repayment plan does not erase your credit history. Under the Fair Credit Reporting Act, accurate information about your accounts can stay on your credit report for up to seven years. A bankruptcy can stay on your report for ten years.
For Further Information
Some credit counseling services charge small or no fees for helping people develop a spending plan. Consumer Credit Counseling Services, credit unions, banks and housing authorities provide financial counseling. For a list of local non-profit credit counseling centers affiliated with the National Foundation for Consumer Credit, call 1-800-388-2227.
For further reading:
• Before You Borrow
The best decision we can make as good stewards of God's money is to never owe money. But there may be cases where there's no other way out.
• Debt Consolidation Fraud and Scams
Turning to a company that offers help with debt problems may seem like a good solution, but be careful of ads that offer quick fixes on debt relief.