Sunday, January 26, 2003

Loan Consolidation Basics

If you have multiple creditors, you may want to consolidate your debt into one loan. There are a number of benefits derived from a loan of this sort. First of all there is a matter of convenience. It is much easier to pay one creditor than five or six. Consolidating your debt also saves time. Prior to consolidating, make sure you choose the lender with the most cost-effective terms.

Home Equity

    If you are a homeowner, you may be able to use the equity in your home to consolidate all of your credit card debt. Home equity loans usually have lower rates of interest than credit cards, which will save you money in finance charges.

Balance Transfers

    If you have a credit card, with a credit limit large enough, you may be able to consolidate all of your other credit cards into one. Credit cards usually offer promotional or introductory rates, sometimes as low as zero percent. You can save a substantial amount of money by consolidating. There will be a balance transfer fee assessed by the card company. Contact the card company with the lowest promotion rate. Consolidating can help you achieve lower monthly payments as well.

Installment Loans

    If you have multiple credit cards, all with different balances and interest rates, you really don't know when they will be paid off. When you consolidate, usually you have an installment loan, with a specific term that allows you to know exactly when your loan will be paid off. The promissory note will explain in detail the amount of your payments and the amount of finance charges you will pay.

Direct Pay

    Some lenders will pay off your other creditors themselves instead of letting consumers pay their own creditors. Each creditor to be paid will be listed on the disclosure statement, along with the other terms and conditions of the loan. The lenders may send a check directly to your creditors, or they may do some type of electronic transfer to get the creditors paid.

Closed Accounts

    A lender may request that you close out all credit cards as a condition of the loan to make sure you don't use the cards after they have been paid. Closing out your credit cards after they have been paid can temporarily lower your credit score. Creditors want to make sure you don't become a credit risk while you are a customer. Incurring new credit card balances could make it difficult to pay both your loan and the new debt.

Foreclosure

    If you consolidate debt using the equity in your home, there is the possibility of foreclosure. When certain events transpire that prevent you from paying, a lender will start foreclosure activity, which could lower your credit score by as much as 250 points. This information will remain on your credit report for seven years. Your home will be sold at a sheriff's auction and you could be responsible for the deficiency balance after the sale.

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