What You Need to Know about Consolidation Loans
A lot of people owe loans to different creditors. They may have a few different credit cards, a student loan, a mortgage, and a car note. Simply keeping track of the payments can be a hassle, and it may seem like the loans never go away.
There are a few alternatives to manage your loans. Some can help you pay off your debt and improve your financial future, while others can create as many problems as they solve. Here, we’ll review some of options you may have.
First, consider the do-it-yourself option. This has two parts. The first is automating as many payments as possible to reduce the headache of trying to remember what bill is due when. Then, you get to work on what’s known as a debt snowball. This plan has been popularized by financial advisor Dave Ramsey. The way it works is that you arrange your loans in terms of smallest to largest. You make the minimum payment on all loans except the smallest. For the smallest loan, you pay as much extra each month as you can. Then, when that loan is paid off, you add the amount you paid toward it each month to the payment on the next-smallest loan. Eventually, you pay down the whole balance.
The debt snowball is a really effective technique. If you can make at least the minimum payment on your debts, your debts can decline quickly.
If you can’t cover the minimum payments, though, you may need to consider other forms of debt consolidation. These can reduce your payment by reducing your interest rate and extending the amount of time until the loan is due.
If some of your loans are student loans, you may want to look into a student loan consolidation. The U.S. Department of Education has information on how to do that.
For other types of loans, you may be able to obtain a consolidation loan from a bank or other financial institution. These can sometimes be arranged as home equity loans, which have lower interest rates. The key is making sure that these loans help your financial situation. They do that if they simplify your payments and allow you to make at least the minimum payment every month.
These loans will hurt your financial situation if they increase your interest rate, or if you immediately borrow more money so that you can’t make a dent in the amount of money outstanding.
The big danger with loan consolidation is that it might really be debt settlement. Some companies that advertise as debt consolidators are actually debt settlement companies. Debt settlement Debt settlement companies promise to renegotiate your loan payments. They often charge very high fees. They may also create a lot of legal headaches for you that are worse than the debt problem you already have.
You may not need a loan to consolidate your debts. Setting up auto-payment and working on a debt snowball can make a big difference in your financial situation.
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