Nearly everyone can a debt consolidation, however, not all debt consolidation packages are identical. Whether you are working towards a complete debt consolidation, home refinance, credit card debt consolidation, or a basic home equity loan, borrowers should do their best to be well informed before making a debt consolidation decision.
Why consolidate my debt? Debt consolidation has many potential benefits:
- Ease a cash flow problem. When life requires immediate cash, putting loans into a single monthly payment can allow flexibility in repayment and can free up cash stores for use where you need it most.
- Free up money for other uses. Debt consolidation offers the opportunity to take money from high monthly payments or interest for other less immediate needs and investments.
- Simplify your current debt. Convert single or multiple high-interest-rate loans into a single payment with low interest. This allows you to avoid the hassle and stress of dealing with multiple deadlines and creditors. Debt consolidation can help make bill paying and book keeping take less time and energy.
- Save money and invest in life! More available monthly cash and less time paying bills means you have less stress and a better chance to invest in your family and personal pursuits.
Don’t settle for the first debt consolidation package you find. These potential benefits are exciting, but they are not the same for everyone. If you are planning a debt consolidation, it is important that you get the plan that’s right for you. Make sure you understand your objectives and the objectives of the services you will be using. Here are 10 Smart Tips to consider when looking into obtaining a complete debt consolidation, home refinancing or basic credit card debt consolidation loan:
- The debt consolidation strategy should be to save the borrower’s life. Debts are repaid with the currency of life: the number of hours that a borrower spends at work to repay the debt. Therefore, a good debt consolidation is one that results in the fewest hours of income-generating work needed to repay the loan. Life is the currency, not dollars.
- Lower payments result by lengthening a loan. Lower monthly payments are made possible, as a general rule, by securing a lower interest rate or by lengthening out a loan, converting short-term debt (12 to 24 months, for example) into long-term debt (60 to 120 months, for example). The issue for borrowers to consider is that a large number of small payments can easily add up to more than a small number of large payments. It can take more years of income-generating labor to repay the large number of small payments than it would take to repay the small number of larger payments. Add up the payments; ideally, the sum of debt consolidation payments
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should be less than the sum of the payments of the debts being consolidated. - Lower payments can result with a higher interest-rate loan that has been lengthened. Lower monthly payments can result by lengthening a loan even if the interest rate of the consolidation debt is higher than some or all of the debts being consolidated. The interest rate of the debt consolidation should be less than the interest rates of the debts being consolidated.
- Heed warnings to avoid the Rule of 78s. A borrower should be wary of a debt consolidation or mortgage refinance that involves the Rule of 78s (HTML) (sum-of-the-digits) method, a pre-computed loan. It is sneaky and complex and may be difficult to see the full implications of such a loan. Hundreds of pages of warnings exist. Visit our Rule of 78s (PDF) page for an in depth comprehensive explanation. Try to stay with loans that collect simple interest.
- Protect home equity for retirement. The equity in a home is a retirement asset, generally speaking, and should not be spent but should be reserved for retirement. When the time for retirement arrives but a would-be retiree’s home is not mortgage-free, retirement may not be an option, and precious retirement assets may have to be spent for rent or mortgage payments. If a home’s equity is used as collateral for a loan, the equity is jeopardized by the possibility of loan default, and the home may have to be sold, which results in the loss of the home’s equity for retirement.
- Lower payments can result even with a heavier debt burden. Lower monthly payments can result by lengthening a loan even if the principle (the amount borrowed) increases due to possible hidden costs such as loan origination fees, house appraisal fees, loan insurance, title searches, buying down the points (paying an up-front premium to secure a lower interest rate), costs that can drive borrowers deeper into debt. Make sure that the possible added costs of debt consolidation are zero or are at least less than the savings effected by debt consolidation.
- Arrange a debt consolidation or mortgage refinance that has no prepayment penalties. A debt consolidation should be used as part of a strategy to achieve long-term financial stability that includes getting out and staying out of debt. Borrowers should use as much as possible of the cash flow freed up by a debt consolidation to accelerate debt repayment, and borrowers should resist the temptation to use freed up money to leverage themselves into more debt. The issue that brought about the need for the loan in the first place should be corrected if the issue is one that can be corrected. A long-term-stable budget that addresses short, medium, and long-term needs should be a principle goal of a financial strategy.
- Make every effort to have crystal clear perspective. Perspective is the ability to see things as they really are. The most popular financial plans and budgets, so called, tend to hide financial reality so that people can do what they want to do. The greatest of human desires is the desire for a quick fix. Lack of perspective, self-deception, denial, and even delusion are the great challenges to financial well-being. Financial plans and budgets should clearly show the answers to the questions, “Where am I financially?” and “Will I be able to retire with dignity?” Only employ methods and tools that tell the truth, enhance perspective, and defeat self-justification.
- Remember to look out for retroactive interest. A loan may be advertised as interest-free for a certain number of months. The interest-free feature may only apply if the loan id repaid within a time limit, and “forgiven” (but not forgotten) interest may be added to the debt consolidation if the loan id not repaid within the time limit. A credit card or debt consolidator should repay the debt consolidation within the interest-free time period or clearly understand the terms of the contract regarding retroactive interest.
- Make a debt consolidation count for something. If a borrower must take on more debt to fix a financial situation, even after shopping around for the best loans available, the extra cost of life needed to repay the debt should count for something. Ideally, a borrower should use the “second chance” possibly afforded by a loan consolidation to accomplish something positive: to get out and stay out of debt, fix the problem that made the loan necessary, use a real budget to stop a spend-and-consolidate cycle, preserve home equity, achieve perspective, et cetera.
