Monthly Archives: December 2014

Personal Debt Consolidation Loans

When you have multiple loans at the same time it becomes difficult to manage them all and this may lead to missing a repayment that may further lead to lose of your home or a low credit score. Personal debt consolidation loans entail bringing together all or most of your loans as one debt so that you can have a single loan repayment each month. It is mostly used by people struggling to manage and pay off their current outstanding debts.

Debt consolidation can occur in two ways:

  1. Credit card balance transfers: Shifting credit card debts to a 0% or low interest rate balance transfer credit card. This does not require securities but you must have a good credit rating to get one.
  2.  Personal loans. In this case, you borrow enough money from a bank or credit union to pay off all your current debts and owe just one lender. You can then close down the other credit cards and loan agreements. The new loan balance will be a summation of the other multiple loans. (Detweiler, 2014)

Secured consolidation loans are loans collateralized using property (usually houses) and have relatively low interest rates but if you miss a payment you might end up losing your home.

Unsecured consolidation loans have higher interest rates charged against them but the lender cannot make a claim on your home in case you default in you repayment.

Debt consolidation loans have various strengths and limitations.

Advantages of Personal Debt Consolidation Loans

  1. Managing debts is easier and more straightforward since all your loans are in a single pool and you only have one interest and one payment to make each month.  You would know exactly what you owe and when your loan will be paid off.
  2. Closing down other credit cards and loan accounts can be an indication to lenders of your good financial management and increase your credit worthiness.
  3. Potential reduction in Interest rates and payments.
  4. Fixed payment for the loan term, usually 2-5years.
  5. Avoids minimum payment trap associated with other loans that keep you indebted for many years.

However, monthly repayment may be lower but the loan term is extended. Hence you are likely to pay more interest at the end of it all.

Before taking up a consolidation loan you should consider how big a loan you will need to offset the other loans, the costs and penalties of early and late repayments and the interest rate, which depends on the level of borrowing. Generally, the higher the level of amount you borrow, the lower the interest rate. You should only take up a personal debt consolidation loan if will end up paying less interest rates than what you would have paid with the multiple loans.

 

Alternative Options To Debt Consolidation

At one time or another you may find yourself in a financial crisis with too many debts outstanding.  You can choose to consolidate your debts or pick any other way out from among the other various options available. The best option depends on the level of your debts, your discipline (ability to commit to an option) and your future prospects. Below is a summary of these alternative options.

  1. Self-help.

This entails listing all you sources of income, fixed expenses such as mortgage and variable monthly expenditures. Self- help requires utmost honesty with yourself or else you will end up storing more problems for the future. You then compare the lists and cut down on any unnecessary costs by, for example, paying utility bills using direct debit cards which have discount offers. Finally, you schedule your repayments and be realistic by working out what you can afford to pay without going beyond your budget. These steps will help in ensuring you meet your basic needs such as housing, food and healthcare.

  1. Contact your creditor(s) as soon as you start to struggle with you debts. Explain to them why you are having difficulty in repayment then try to come up with a manageable repayment plan. The lender may decide to suspend your payments for a short time, restructure you debt or repossess the debts if they are secured.
  2. Debt Relief Services. If you can’t work out a repayment plan with your lenders on your own, you should consider contacting debt relief services such as credit counselling who will advise you on how to deal with your debts. Be wary of illegitimate firms and high service costs.
  3. Credit counselling. Credit counselling organizations have certified and professional counsellors that give advice on financial management and developing budgets. Many institutions offer these services and referrals.
  4. Debt Management Program. Here, you deposit money each month with the credit counselling agency who then uses this money to pay your unsecured debts according to a scheduled agreement between you and your lender. There are many charities that offer this for free.
  5. Debt settlement Programs. This is offered by for profit firms. The firm negotiates with your lenders to allow you to pay a lamp sum settlement, usually less than the full amount owed. You deposit a specific amount of savings each month into an ‘account’ till It’s enough to pay off the settlement. In the meantime you stop making monthly payments to the creditors.
  6. This has long lasting and far reaching consequences on getting jobs and your credit scores. You are discharged by a court order from repaying certain debts. It offers a fresh start for people who have gotten into financial difficulty and cannot repay their debts.

 

Most debt options have an impact on your credit score, making it harder to open a new bank account or get a loan. It’s important to seek advice before embarking on any of the options.

 

 

Private Student Loans Consolidation

This entails grouping your different private student loans into one mega loan by borrowing funds to pay off the many debts and owing just one lender. The main benefits associated with private student loans consolidation include ease in keeping track of your debts since you only make a single monthly payment instead of many different monthly payments on loans. You also face reduced monthly payment which however, comes at the cost of increase in total interest paid over the prolonged life of the loan.

Private student loans cannot be consolidated with federal student loans. Moreover, the low interest rates imposed in federal student loan consolidation are not enjoyed by private student loan borrowers. Private student loan consolidation is merely replacing one debt with another as the loans do not compete on prices. There is no loan forgiveness for private student loans.

Private student loan interests are charged based on the credit score. Therefore, if your credit score improves significantly from the time that you first obtained the loan you might be charged a lower interest rate if you consolidate your debts with another lender.

Different private education loans tend to have interest rates that have similar characteristics to home equity loans. Hence you can use a fixed rate home equity loan to pay off or refinance your private education loans that have variable interest rates. This effectively locks in the interest rates.

Private loans are consolidated by private programs which determine and set the interest rates. This is why they usually have variable interests that are subject to fluctuation as the year progresses. You should therefore consolidate private student loans when interest rates are low.

Before taking up a private student loan consolidation, you should ask yourself the following questions:

  • Is the interest rate variable or fixed?
  • Are there any additional fees such as costs charged on moving the different loans to one lender?
  • Is there a prepayment penalty and how much is it?

To get the consolidated private student loan, private lenders require that you must pass the credit check at stellar rates, meet a minimum loan balance and be a graduate. If you are a new graduate with little credit, you must have a cosigner for you to be eligible for this type of loan.

Some of the private student loan consolidation providers include banks, college foundations and various state agencies. For example we have Cedar education, Citizens/Charter One Education Refinance.

Federal Student Loan Consolidation

United States

Federal students’ loans are guaranteed by the US government. In federal students’ loan consolidation, the Department of Education purchases existing loans and then charges a fixed interest rate based on a weighted average of the prevailing interest rates of the loans you are consolidating. Most federal loans including Direct PLUS, Stafford and Perkins can be consolidated with other federal loans.

The advantage of federal debts consolidation loan is that borrowers can apply at any time regardless of their credit score status and loan defaults at Loanconsolidation.edu.gov and they will always get fixed interest rates. In addition to this, regardless of market fluctuations, there is a cap of 8.25% interest rate on consolidated federal loans.

United Kingdom

Student loan entitlements are guaranteed and recovered by the students’ future income calculated using a means tested system from the student’s future income. The loans cannot be included in bankruptcy but they do not affect a person’s credit rating.

Consolidating with a private lender is not advisable. It may lower the interest rates that you pay but in exchange you will lose valuable consumer protection such as access to federal income based payment, forgiveness programs, generous forbearance and deferred options. Private lenders give the loans to the lowest risk borrowers (people with steady jobs, good credit rating and good income). Other lenders restrict this loan to business, law, medical and engineering degrees. Some of the banks offering federal students loan refinancing are the Royal Bank of Scotland plc.’s Citizens Financial Group, SoFi and CommonBond.

Parents with Federal PLUS loans might benefit from consolidating their federal loans with a private lender if they have at least $20,000 in such loans and the interest rates can be reduced by at least 2%.

The extent to which the federal student loan consolidation is optimal depends on particular student loan specifics. You should think about the benefits and drawbacks of consolidating your student loans before taking it up. You should also choose a repayment plan for your consolidated loan which include: extended repayment plan, PAYE, Income Contingent Repayment and Income Based Repayment. Many of these will reduce your monthly payment but extend your loan term such that at the end of your repayment you will have paid more interest.

Generally, consolidating loans helps you in keeping up with different loan payments and offer fixed interest rates.
Student loans normally have no prepayment penalties. Federal student loans should be consolidated as soon as possible and should be prioritized over personal loan repayments as rates increase every year and it’s better to lock in the lower current rates.