Consolidating debt into one payment
Even if the monthly payment stays the same, you can still come out ahead by streamlining your loans.Say that you currently have three credit cards that charge a 28% APR; they are maxed out at $5,000 each and you're spending $250 a month on each card's minimum payment.
These organizations do not make actual loans; instead, they try to renegotiate the borrower’s current debts with creditors.) Freeman says that debt consolidation loans are most helpful for those who have multiple debts, owe $10,000 or more, are receiving frequent calls or letters from collection agencies, have accounts with high interest rates or monthly payments, are having difficulty making payments or are unable to negotiate lower interest rates on loans.These loans are usually offered by financial institutions, such as banks and credit unions; there are also specialized debt-consolidation service companies.There are two broad types of debt consolidation loans: secured and unsecured.“If the principal is paid down faster [than it would have been without the loan], the balance is paid off sooner, which helps to boost your credit score,” says Freeman.For example, say an individual with three credit cards and a total of $20,000 owing at a 22.99% annual rate compounded monthly needs to pay $1047.37 a month for 24 months to bring the balances to zero.This amounts to a total savings of $7,371.52 ($3,750 for payments and $3,621.52 in interest).
Of course, borrowers must have the income and credit worthiness necessary to allow a new lender to offer them at a lower rate.
“If you can get your bank to approve a loan, that’s great," says Tim Gagnon, assistant academic specialist of accounting at the D'Amore Mc Kim School of Business at Northeastern University.
"But your bank may not be looking to keep you as a client and your credit scores may not be high enough to meet their lending requirements.” If you’re turned down by your bank or credit union, Gagnon suggests exploring private mortgage companies or lenders.
Although each lender will probably require different documentation depending on your history, the most commonly required pieces of information include a letter of employment, two months' worth of statements for each credit card or loan you wish to pay off, and letters from creditors or repayment agencies.
If you have a good payment history with a bank, credit union or credit card company, asking that institution about a debt consolidation loan should be your first step.
One is to consolidate all their credit card payments onto one new credit card – which can be a good idea if the card charges little or no interest for a period of time – or utilize an existing credit card's balance transfer feature (especially if it's offering a special promotion on the transaction).