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.