Most consolidation programs get you out of debt in 48 months.

WARNING

Get Every Single Thing They Tell You In Writing.  If it's not in writing, it means they won't do it.

Consolidation Loan: A lender lends you money to payoff your bills.  You payoff all your credit cards and other debt, now your payments have all been consolidated into just one monthly payment to the lender, hopefully at a lower average APR than your current bills.  You should close out all the accounts you paid off with your consolidation loan, so you don't run up the balance again.

Consolidation Plan: A "bill paying service" that has the influence to work with your creditors to reduce or eliminate your interest and late fees, and agrees to send them your payment every month.  You in turn pay the "bill paying service" a monthly payment equal to the amount of all your accounts in the plan, plus a service fee, and maybe interest if they could not get all of it removed.  This should hopefully cost much less than your total payments before, since most credit cards will drop the interest rate to 0.  Notice that no one is lending you money, they are just restructuring your debt, which is safer.  Don't confuse these companies with lending institutions, or banks, they are not lenders.  Usually car loans, home loans, and other secured personal loans cannot be brought into this type of plan because the bill paying service cannot get banks to relax the interest.  This type of plan usually works best on credit cards, gas cards, and other types of credit, at the discretion of the creditor.



Click Here to find out how to pay lower interest on your credit card debt

 

WARNING

Don't ever in a million years consider a title loan on your car.

Title Loan:    It's a loan with your title as collateral, but the interest rate can be over 200%!  Our stupid lawmakers keep voting down legislation against this high interest because industry lobbyists are very influential.   The lawmakers claim that passing legislation mandating a lower APR would put the title loan companies out of business.  Well gee professor, how do banks survive lending people money at only 18%? Title lenders reel you in promising quick cash telling you your cash problems are going away, but they are actually just beginning. Many people don't realize how insanely high the interest is and cannot maintain the payments.  The type of person that signs up to a title loan is a fool, because if they are so strapped for cash that they'll fork over their title for cash, where do they think they are going to get the cash to pay back this ultra high APR loan?   Many people default after the first month and their car is repossessed.  It's a legalized way for them to steal your car.  This is the riskiest type of loan and is designed to steal your car!



Home Equity Loans:  Home equity loans are another vehicle used to consolidate debt.  What borrowers do is take out a home equity loan to payoff their credit cards, then close out those accounts.  Now they just pay the bank one monthly equity loan payment check with a lower APR.  For example, in early 1999 typical credit card and department store card interest rates were 18-22%.  But home equity loan APR was only 9%, and many had no fees.  Equity loans will cut the interest portion of your payment in half, which has the effect of paying off your principal much faster than credit cards.  One benefit of home equity loans is you usually get to write the interest off your taxes, making the APR on the loan effectively lower.  But BE CAREFUL!  You cannot write off interest if the loan is in excess of the value of you home.  Which brings up our next point:

DON'T BORROW MORE MONEY THAN THE EQUITY IN YOUR HOME!

The real unscrupulous lenders keep sending you offers in the mail.  "We'll lend you up to 125% of the value of your home!"  Wow, you just struck oil!  This is very dangerous oil however, because if you default on the loan, not only do you lose your house, but you still owe the other 25%.   The lenders who offer these risky loans are in it only for their own greed.   Because they are writing higher loan values, they group them together and sell the portfolio to institutional investors, now their hands are washed of it and so what if you default, they made their money and moved on to the next group of borrowers. 

Any bank with a conscience will only lend you up to 80% of the equity in your home.  They send out an appraiser to get an accurate value of your house, then they determine how much equity you have in the house, and lend you up to 80% of that value.  This is the safest way to do a home equity loan.  You must evaluate whether an equity loan makes sense for your financial situation.  You have to weigh the APR, and the loan fees if any against the APR of the debt you are trying to eliminate.  Make sure you close out any accounts that you are trying to pay off.  Borrow only enough to payoff the accounts in full.  You might not be able to borrow enough to pay off all your debts, so don't straddle the cash across all your accounts.  Use it to payoff your top rate cards, and close them out.  

Real Life Example:

You have a gas card with a balance of $400 at 18%, a Master Card with $6000 at 14%, a VISA with $8000 at 15.9%, and a department store card with $6500 at 22%.  You owe a total of $20,900.   Your local bank charges 12% interest for equity loans and has an $800 loan origination fee.  Your strategy might be to borrow $20,900 with an equity loan from the bank to payoff all your balances, and close out the accounts.  Now you'll still owe $20,900 but at a lower APR of 12%.  Also, at the end of the year, you are usually allowed to write-off the interest you paid, effectively making your APR even lower.   Most equity loans are 15 year notes, so try to send in extra principal every month to accelerate that payoff time.  Make sure your bank allows pre payment and extra principal payments.  But supposing you only have $7500 equity in your house.  How can you consolidate all your debt with $7500?  You can't, you'll have to choose which accounts to payoff.    The department store and gas card have the highest APR, so shoot for those.  You'll need to borrow $6900 with your equity loan.  There is no reason to borrow more, and you should not either.   Sure you would like to buy down some of the interest with your equity, but if you don't have enough to pay it off and close the account, then there is a very high risk that you'll just run the balance back up again.  Some accounts you can close, then just continue to pay them off, then you're OK using the remainder of your equity balance to buy down whatever you can on the balance.  But we cannot stress the importance enough that you must not let your balances go back up.  Consolidation loans and equity loans are potentially dangerous in the wrong hands because you are adding another channel of credit, so use it wisely, and always be fully aware of what you are doing.

 

The Proper Way To Use Consolidation Loans

Consolidation loans are not for everyone and can be dangerous if you aren't careful.  There's a lot of stupid people who don't pay attention when they consolidate their loans.  Sometimes the interest rate can be higher than the total APR on your current debt.  Some unscrupulous lenders charge an enormous up front fee that they don't go out of their way to tell you about.  Some of these same lenders might even roll the fee into the loan payments so hide it.  If the loan's APR is higher than your credit cards, you'll lose money and should not close on the loan. Don't consolidate just for the sake of consolidating.  The word is misleadingly dangerous.  Your brain tricks you into thinking that consolidation means less.  Most people think consolidation loan means they'll pay less, but that may not be the case.  Consolidation just means that the monthly payments from your creditors will be consolidated into one payment to one consolidation lender.  Basically you can't just borrow your way out of debt (DUH!), you must pay it off.  A consolidation loan should only be considered if the interest rate is less than all the credit you owe AND you close out all of the accounts you paid off.  Also, if all of your debt is high APR loans that cannot be brought into consolidation plans, then a consolidation loan with a lower APR might be useful, but all the other loan accounts should be closed as they are paid off.

WARNING

Don't let the lender trick you into thinking that lower monthly payments means less interest.  They could have a high APR and stretch the payments out over a long period of time, which is costing you more in the long run.   Car dealers use this trick all the time on car loans.  They hide high APR by stretching your payments out to 60 months, making them seem lower.

Consolidation loans are  DANGEROUS for impulsive people because all you are really doing is shifting all your debt from one place to another, effectively OPENING ANOTHER CHANNEL OF CREDIT, while freeing up your credit cards.  Some idiots then proceed to fill up their credit cards again, now they have double the debt they started with, and they are paying up to 22% on their consolidation loan because they weren't paying attention to the APR when they signed up.  Some consolidation lenders are unscrupulous and make it appear they are eliminating your debt, when you are really taking on more debt. They often hide the APR from you and try to charge up front fees for loans, which is illegal.  They might also offer you a lower payment, but check their math and you might discover that it ends up costing you more than your original bills.  Don't fall for this scam! Always check their numbers.

WARNING

Some lenders just send you a pre approved check out of the blue, hoping you'll just sign up to their program without doing your homework first.  Here's what usually happens.  You'll get a check in the mail from them for say $3500 with a letter that says: "Congratualtions, attached is your check for $3500 to open your loan account.  Because you've demonstrated your financial responsibility, we've sent you this first check for your new Greedy Bank Of America Credit Line.  Use it to make that special purchase, pay a few bills, enjoy a relaxing getaway, fix your car or home, it's your money, so it's up to you." Of course if you're smart like we know you'll be after reading, you'll scan through the fine print to see the interest rate is a whopping 24%!  You should be asking them why they want you to pay them 24% to payoff bills that are at 18% or lower!  On top of that, you'll also note the fine print states there is an annual fee for participation in this revolving loan program, and fees for documentary stamps and personal property taxes.  Of course you can purchase insurance options as well.  Anytime someone just sends you a check in the mail like that, just rip it up, they are doing you a big disservice.  The only thing they care about is stealing you out of your current debt and dipping you into their 24% APR, riddled with fees that they don't tell you about on the front page of the letter.

If you take out a consolidation loan, consider these simple rules:

NEVER, EVER, EVER, SIGN A CONSOLIDATION LOAN WITHOUT FULL DISCLOSURE IN WRITING OF:

1) The principal amount that you are borrowing.
2) What the interest rate APR will be.
3) How many payments you will pay.
4) Closing costs, if any.

THIS SHOULD BE CLEARLY SPELLED OUT IN THE CONTRACT.  IF IT'S NOT ON THE CONTRACT, DON'T SIGN!

If you don't know how to check their math and verify the monthly payments, don't sign the loan papers, you have no business taking out a loan.  You'll have no recourse later because in court they'll just say "you signed the loan".  Verbal statements or claims made by salespeople do not hold up in court.  There are many unscrupulous "lenders" out there who prey off people who are naive or have bad credit.  They'll offer you the world, lying through their teeth to get you to sign up to their program.

If you chose a consolidation loan instead of a consolidation plan, be sure you use the entire amount of the loan to payoff your accounts, and close all the accounts you are paying off.  DO NOT keep any cash for yourself to spend.  Use all the funds to payoff the debt.  No clothes buying, no dinners, no trips, no nothing.   Borrow just what you need to payoff your accounts.

"Consolidation Plans"
(Also called Bill Paying Services, Consolidation Programs, Reduced Interest Payment Programs, or One Pay)
Some debt management company plans are not consolidation loans, they call their product a "consolidation plan" or "bill paying service".  They are simply bill paying companies that restructure your debt instead of adding to it with a consolidation loan.  The distinction is subtle, but consolidation plans are not loans, they don't lend you any money, you are not taking on any new debt, you just send the monthly payment to them and they pay all your creditors. With a consolidation plan, the company works as a liaison between you and your creditors, and negotiates with them to reduce or eliminate your interest and late fees, and they are usually successful at getting all the credit cards to drop the interest to 0.  This allows the debt to be paid off much sooner, since you are only paying off principal and no interest.  Once you enroll in the program, your creditors going forward are forbidden to contact you.  They can only contact your debt manager and not you. You send the bill paying company one monthly payment, and they in turn payoff all your creditors a little bit at a time. Usually when the smallest creditor is paid off, more cash is available to be applied to the remaining creditors, paying off those balances even more rapidly. All the companies require your payment in money order form only to guarantee that you'll never bounce a check, because they just forward the funds to your creditors.  If they allowed you to mail in a check and it bounced, you might anger some of the creditors into kicking you out of the program, then you're in trouble, because you interest shoots back up to 18% or whatever it was before.  Bill paying companies can make money by investing the monthly payments you send them in mutual funds that earn double digit income.

Up Front Fees:
Handling the up front fee is tricky.  Some non-profit organizations usually allow you to enroll without paying this fee.  But the profitable companies will ask you to send them a money order for $300 or more before they even take you in as a client.   This is because they need to get all your account statements and balances and contact information to check with all your creditors to see who will drop the interest to 0%, and who will participate in the program at all.  Car loans and home loans are out.  This preliminary work takes time and resources on your debt consolidation company's part, so they want a some compensation up front.  However, some of them are quite lacking about disclosing to you IN WRITING their complete user agreement until you have sent them your money.  This is completely unfair and insulting to you and you should not sign up unless they have sent you at least the verbage of what their final agreement is. 

The reason you want to read his agreement first, is maybe there is something there that you disagree with and would not sign.  But some of the profit companies take your money order first, then send you a proposal with the final agreement.  Then you see something you don't like on the contract, the company begins to give you a bad feeling, and you want out, but you might lose your fee.  Even though the salesman may have lied to you and told you your $300 - $800 fee is refundable, he did not tell you it's only refundable at the end of the program 48 months later.  Quit now and you forfeit your deposit.  This is why it's so important to get everything in writing before you enroll. 

NEVER agree to enroll in the program until you have seen a contract specifically detailing YOUR entire consolidation program, including a listing of all the accounts and balances in the program, the interest if any, what your monthly payment will be, HOW MANY MONTHS, and any other little fees that they sneak past you.  Any reputable company should give you your depoit back within 30 days if you don't enroll.  At the very least you should get some of it back.  If you do not a written agreement, DO NOT SEND THEM MONEY!  Assume every penny you send them is completely non-refundable.  You need to know what accounts they are claiming will be paid under this program.  If they don't itemize this, don't sign up. 

TIP: When you itemize all the accounts you want to be included in the plan, make sure you have all your ducks in a row and give them all the information they need in one shot.  Don't go back to them after they went through all the trouble of determining your monthly payment and add another account to the pile.  They'll have to start over, that will increase your payments, accusations will fly, and it just becomes a big pain in the neck for everyone.  Do your homework first, and send the consolidation company one packet containing everything they need to get started.  Don't spoon feed them information, as time is of the essence.

Do not sign their contract unless you agree with everything in it.

REVIEW Of Loans and Consolidations

• Stay away from losers who don't disclose to you the APR in writing.  You should never in a million years sign any contract that does not have full complete disclosure of all the facts, even if they tell you "Come on, everyone signs this contract".

• Don't start a consolidation loan or program unless the APR is less than your current debt.

• If you do get a consolidation loan instead of a consolidation program, close all your accounts first.

• Throw out ALL department store and other retail store cards.  Most are at 18%-23% or more.

• Never pay just the minimum payment.  It'll take you years to payoff the debt, and cost you even more interest as the balance accumulates each month.  Always send in more than the minimum payment amount, and indicate extra principle on your check for car loans, home loans, etc.

• Don't be afraid to seek professional help from non-profit organizations. It's not a sign of defeat, it's a sign that you're taking control again and you need help.  When you bring your car into a mechanic you're not admitting defeat to anything, you're just going to an expert in the field who knows how to solve your problem.  If you have credit problems you need a certified professional in the field of personal finance and credit to solve your problems.

  Here's some sites with consolidation plans or loans:

Click Here to find out how to pay lower interest on your credit card debt

Go to the next chapter All About Auto Loans

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