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Consolidation FAQs

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Debt consolidation can be a tricky thing, sometimes even confusing. There are going to be a number of questions that come up as you try to navigate this stressful territory. Here are some of the most common questions that people have when they are looking into debt consolidation.

What is Unsecured Debt?

Unsecured debt is debt that has no collateral put down with it. Having a credit card without a savings account, for instance, is unsecured debt. Any overdue bills, rent, or unsecured personal loans fall under this category as well.

How Can I Consolidate My Unsecured Debt?

You can use a cash-out refinance or a second mortgage as methods of consolidating your unsecured debt. In both cases, the equity you hold in your home would become your collateral. The money you receive will pay off your previous debts and, in essence, move all your debt to the mortgage lender. Generally, though, this will be at a lower rate of interest than the other debts you had.

Refinance or Home Equity?

Refinances generally have lower rates of interest than home equity loans, but you will have to take into account the associated fees (which can vary from lender to lender) as well as the long-term cost of refinancing or taking out a home equity loan. You'll also need to take the tax benefits of each into account, as these will affect the financial appeal of one over the other.

Are There Other Ways to Get Out of Debt?

The best way to get out of debt is to pay it down out of pocket. Any other method should be something to fall back on. There are smarter ways to pay off debt than others. For instance:
  • Pay off high-interest debts first. Even if they seem smaller or insignificant, you're going to want to get them out of the way.
  • Some debts may seem like they're more of a burden than others, but that might not be the case. Take a look at the tax benefit you receive from your mortgage, for instance, to see whether or not you want to prepay that in lieu of taking care of something that is affecting your finances more negatively. Just because it is the bigger loan doesn't mean it's necessarily the most harmful.

What About Personal Loans?

If you are in good credit standing, and have built up a decent amount of equity in your home, you can probably find a personal loan with a low interest rate. This should be among your list of options for consolidation. If your credit is bad and you have no collateral, you can still probably get an unsecured personal loan, but the interest rate probably won't be very good.

Should I Hire a Credit Repair Organization (CRO)?

Probably not. There is nothing they can do for you that you cannot do yourself, for less money. They also tend to be, by and large, illegitimate businesses. You have to wade through a lot of scams to find someone reputable.

How Does Debt Settlement Happen?

Debt settlement is an option that creditors give to borrowers who have been delinquent on their payments. Rather than let you file for bankruptcy and potentially receive little to no money for themselves, they may settle for as little as 20 percent to as much as 75 percent of what you owe them.

Doing this on your own means saving up money for a settlement and avoiding collection agencies' phone calls for a few months; creditors will not negotiate with people that are current on their payments. They won't make it easy, however, for you to do this. You'll need to know how to barter and speak their language.

Some people have used debt settlement agencies to help them out, but these companies often charge outrageous prices for their services, when they aren't simply scamming people out of their money. It may be worth it to talk to a bankruptcy attorney before you pursue debt settlement, either by yourself or with another company.

Is There a Quick Way to Get a Good Credit Score?

Not really. If there are mistakes on your credit report, they can be fixed and your credit can be improved quickly. However, if you legitimately have bad credit, the only way to build it up again is to practice better habits:
  • Make all your payments on time.
  • Take care of any delinquent payments first. If you are having trouble, try negotiating with your lender.
  • Applying for new credit cards can harm your credit.
  • Don't max out your credit limits.

What is Debt Snowballing?

Debt snowballing is a simple personal debt-management system. Once you have made all the minimum payments on your debts, you begin to pay them off, starting by committing extra money to the smallest until it's paid off. You then work your way up to the biggest debt. It is very nearly not a strategy at all; human nature would have us get bothersome things out of the way quickly. The psychological value is having a smaller number of debts facing you, if not significantly less debt in total. Paying off your debts according to the highest APRs might be a more financially sound decision in the long-term.

Patrick Hanan  Posted by Patrick Hanan on June 15, 2010

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