Real Life Debt Consolidation Loan Example
You have a gas card with a balance of $400 at 18%, a Master Card with $6000 at 14%, a VISA with $8000 at 15.9%, and a department store card with $6500 at 22%. You owe a total of $20,900. Your local bank charges 12% interest for equity loans and has an $800 loan origination fee. Your strategy might be to borrow $20,900 with an equity loan from the bank to payoff all your balances, and close out the accounts. Now you’ll still owe $20,900 but at a lower APR of 12%. Also, at the end of the year, you are usually allowed to write-off the interest you paid, effectively making your APR even lower. Most equity loans are 15 year notes, so try to send in extra principal every month to accelerate that payoff time. Make sure your bank allows pre payment and extra principal payments. Online sites usually have lower rates than banks. Now you are paying one check every month to pay off your credit card debt.
But supposing you only have $7500 equity in your house. How can you consolidate all your debt with $7500? You can’t, you’ll have to choose which accounts to payoff. The department store and gas card have the highest APR, so shoot for those. You’ll need to borrow $6900 with your equity loan. There is no reason to borrow more, and you should not either. Sure you would like to buy down some of the interest with your equity, but if you don’t have enough to pay it off and close the account, then there is a very high risk that you’ll just run the balance back up again. Some accounts you can close, then just continue to pay them off, then you’re OK using the remainder of your equity balance to buy down whatever you can on the balance. But we cannot stress the importance enough that you must not let your balances go back up. Consolidation loans and equity loans are potentially dangerous in the wrong hands because you are adding another channel of credit, so use it wisely, and always be fully aware of what you are doing.Benefits of Debt Reduction Services
- Frees you from high APR (APR is either 0%, or very low).
- You only have to write one check per month for all your bills.
- You avoid the black marks of unpaid bills on your credit history.
- You get monthly progress statements on your debt consolidation.
- Once you enroll with iDebtAssistance and DebtSaviors your creditors can no longer call you.
- You can now pay down your debt balances where you could not before.
- Credit counselors can assist you and give you advice as part of the program.
- Credit card companies are willing to drop the interest rates to 0% to get their money back.
Debt consolidation programs end creditor harassment
Once you enroll in the debt reduction program; your creditors going forward are forbidden to contact you. They can only contact your debt manager and not you. You send the bill paying company one monthly payment, and they in turn payoff all your creditors a little bit at a time. Usually when the smallest creditor is paid off, more cash is available to be applied to the remaining creditors, paying off those balances even more rapidly. All the companies require your payment in money order form only to guarantee that you’ll never bounce a check, because they just forward the funds to your creditors. If they allowed you to mail in a check and it bounced, you might anger some of the creditors into kicking you out of the program, then you’re in trouble, because your interest shoots back up to 23% or whatever it was before.
People who only send in the minimum payment to their credit cards would take 10 years to pay them off. By having a debt consolidation service step in for you and get the interest rate removed, you can pay it off a lot quicker. As the debt consolidation service pays off the balances of your accounts, they then focus on the remaining accounts and rapidly pay those off.
Notice that no one is lending you money; they are just restructuring your debt, which is safer than consolidation loans. Don’t confuse these companies with lending institutions, they are not lenders. Usually car loans, home loans, and other secured personal loans cannot be brought into this type of plan because the bill paying service cannot get banks to relax the interest. This type of plan usually works best on credit cards, gas cards, department stores, etc., at the discretion of the creditor.
Some of the “for profit” companies charge between 1 – 5% of your monthly payment as a service fee. The “for profit” companies usually have up front fees of $300 or more before they’ll even take you on as a client. Sometimes the fee is refundable after 30 days if you decide not to enroll, sometimes you’ll lose the fee, and sometimes it’s refunded at the end of the program, usually 48 months. Some salespeople will say your fee is refundable, but you later discover it’s only refundable at the end of the program 48 months later, so ask. If you quit the program before it’s over, all fees are non refundable. A typical profit company might charge you over $600 in annual fees that are added onto your monthly payment. The non-profit organizations might only charge a tiny monthly fee to cover administrative costs. Many fees are optional with non-profit organizations, because many costs are paid by pools from all the creditors and other resources. Sometimes you only have to pay them if you can afford to. Usually it will cost you less to deal with the non-profit organizations than with the “for profit” companies.
Naturally, the “for profit” companies will try to talk you out of dealing with the non-profit organizations, scaring you with tactics like pointing out the fact that most of your fees with non-profit companies are paid by the creditors. Because of this, the “for profit” companies claim that the non-profit organizations are not acting your best interest. But that’s hogwash, you still end up with the same goal of reducing your interest on your credit cards. How can that not be in your best interest? Your up front fees with non-profit organizations are either cheaper or non-existent, and your monthly payments may be lower also because they have lower per month fees.
Most creditors will drop the APR and late fees if it means they’ll recover their investment in you instead of writing off a loss, or wasting money on collection agencies. Usually one requirement of relaxing the interest is that you must close all the accounts that you are consolidating. You send your payments to the debt management company in cashier’s check or money order. Some organizations can also do electronic funds transfer. Never send cash, it’s not traceable. With all the accounts the debt management companies maintain, it’s hard to verify that all our checks are good, so they all want money orders.
It may appear on your credit report that you are working with a credit counselor or debt management company. No company can tell you this won’t happen. It’s up to the individual creditors to decide whether the information should appear in your credit report. No matter what your debt manager tells you, they have no control over this.