If Someone is Planning on a Debt Consolidation Loan for Debt Relief this New Year, Read these Tips from American Financial Solutions on What to Avoid

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Many people consider debt consolidation loans as the way to fulfill their New Year’s resolution to get out of debt. However, sometimes those loans can lead to even greater hardship.

Debt consolidation

American Financial Solutions

Anyone using collateral, such as a home or car, to secure their debt consolidation loan could find themselves in a very vulnerable position .

The beginning of every New Year brings on the hope and plan of people whose resolution is to get out of debt. From commercials on television to advertisements in the mail, there is an increase in the number of banks and credit unions encouraging debt consolidation loans to help people make multiple payments more manageable. While these streamlining loans may be genuinely beneficial for some, it is important to know how these loans can help finances or lead to additional debt distress. Below, American Financial Solutions outlines important items to consider in a consolidation loan.

When to consider the loan

A debt consolidation loan may be a tempting option if someone has a difficult time organizing multiple bill payments each month. The loan may also be appealing for people who cannot keep on top of bills and loan repayments due to financial reasons.

Advantages

There are two main benefits:

  • If the consolidation involves changing unsecured debts into secured debts, people may be able to benefit from lower interest rates. As a result, more of the money paid goes towards paying down the debt rather than interest. This means the debt may be paid off sooner.
  • In addition, it can be more convenient to make payments to one company, rather than multiple creditors.

Disadvantages
Unsecured debt consolidation loans may involve a longer repayment term. So, even if the new monthly payment is low, someone could actually end up paying more in total interest over the term of the loan. It’s important to check interest rates and fees that may be charged in a loan and determine the overall cost to borrow the money, before moving forward. Getting advice from a non-profit credit counseling agency, like American Financial Solutions, can be a good starting point for those daunted by the numbers.

Also, anyone using collateral, such as a home or car, to secure their consolidation loan could find themselves in a very vulnerable position if they have trouble making payments. In this situation, collateral could be seized by the creditor, leaving the person in a worse situation than they were in before taking out the loan.

Another disadvantage is that when the new loan is taken out and credit card accounts and other loans are paid down to a zero balance, people may be reluctant to close the accounts. This could lead to using the cards again and ending up with even more debt – the original debt in the consolidation loan and the new charges on credit cards.

Qualifying

People will typically qualify for an unsecured debt consolidation loan if they have a good credit score and a low debt-to-income ratio. This works to reassure lenders that someone can repay the money that has been borrowed, as well cover their other monthly bills and expenses. An acceptable debt-to-income ratio would be 36% or less including mortgage payments.

Consolidation loans can be difficult to obtain if a person does not have good credit. Lenders generally do not want to lend money to pay off other debt. If the credit report shows a history of late payments to creditors and trouble paying bills, the person probably will not qualify.

Debt management plans may be a good alternative for people in this position because it is not a loan. Instead, it is a consolidation of debt payments into one payment per month. Debt management plans can be accessed with the assistance of a credit counseling agency.

Finding the right consolidation loan

First, people need to know exactly how much they need to borrow and the amount of payment they can make each month. They will also need to establish whether they are able and prepared to secure their debt consolidation loan with collateral, if necessary.

Research: Examine interest rates, company profiles and their customer service backgrounds.

Compare: Add up all the monthly payments, interest and charges that will be paid on existing debts. Then do the same for the best debt consolidation loan being considered.

Fine-print: Before signing anything, people need to read through the loan agreement with a fine-tooth comb to make sure they are aware of all the loan costs you’ll be liable to pay.

American Financial Solutions (AFS) is a non-profit financial education and credit counseling agency. Accredited by the National Foundation for Credit Counseling and the Association of independent Consumer Credit Counseling Agencies, AFS is committed to helping people improve the quality of their lives through financial education and counseling. Check us out on Facebook, Google+, Twitter or Pinterest.

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Becky House

Becky House
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