DEBT CONSOLIDATION LOANS:
How they work and are they right for you?

"Debt Consolidation Loans" and "Debt Consolidation Companies", what exactly is the difference?

With the proliferation of debt consolidation companies recently, I think there is a lot of confusion about what exactly the difference is between them and debt consolidation loans. I want to take a moment to explain the difference here.

The definitions that I'm about to give for each are "my opinion only". Although I think they're right on the mark, they are still just an opinion and some may differ with me.

A "debt consolidation loan" take place when a lender, individual or corporate, loans you money to pay off other loans and you sign a "note" promising to pay it back. Thus the term "loan". This can be a note loan, no security, a loan secured by personal property, a loan secured by a car, or a loan secured with your home, as in a mortgage loan. If you fail to repay this debt consolidation "loan", you will suffer the consequences. These can include collection calls and letters, being sued in court, having your wages or bank accounts garnished or losing your security (i.e. your car or home). However, unless you owe a large amount, most creditors are not willing to go to such extremes.

A "debt consolidation company" (also known as credit counselors) combine all of your unsecured monthly bills into one lower monthly payment and a lowered interest rate. Although the service is NOT A LOAN they may be able to assist you in dramatically reducing your overall interest rate and monthly payments. This is done through a non-profit credit counseling agency that is designed to assist you in the repayment of your unsecured debt. Creditors receive certain tax savings for contributing to the program, in return they offer reduced interest amounts sometimes as low as 0%. But only through an approved non-profit credit counseling agency can you obtain the best rates.

For information on Debt Consolidation Companies, click here.

Now, having said that, it is my opinion that if you have the available equity, it MAY make more sense to obtain a debt consolidation loan, or possibly even refinance your first mortgage along with other debt into a low rate, tax deductible loan. The reason I say "may" is because if you are getting this loan to pay off debt, the absolute worst thing that you could do is to go out right after paying everything off and charge it all back up again. I have seen this many times in my career.

I had one customer of mine that came back to me three times in 18 months to consolidate debt! (luckily he had a lot of equity). On the third time, I made him bring me the cards and I watched him cut them up and I even typed a letter to his creditors, from him, requesting them to close the account and stating to remove him from their mailing list and that if they called him again to offer any more credit that he would seek legal counsel. I then enclosed the letter with the check from the loan and personally mailed it off for him.

If you are the type of person that cannot help using credit, I beg you, DO NOT GET A HOME EQUITY DEBT CONSOLIDATION LOAN! Unless you want to end up like the guy I just told you about who tapped out his equity and eventually filed bankruptcy. To learn more about how debt consolidation and credit counseling works, click here.

Most of the time, not all but most, if you have a lot of debt and own a home, it's a good idea to consolidate those debts into one simple lower rate, lower payment and usually, tax deductible loan. If you do tend to spend whatever money is available, please do be careful not to run your credit cards back up. But also, you may want to make sure that you DO NOT get a home equity line of credit. This is like a credit card with a very large line of credit secured by your home. Think about it. If you're getting this loan for a debt consolidation, does it make sense to allow yourself to be tempted with an additional $10,000, $20,000 or more that's available as easy as writing a check?

Again, there are two sides to every story. So, if you feel that you can trust yourself, Home equity lines of credit can be very beneficial, even when you are using part of the line as a debt consolidation loan. For instance, if you are making an addition to your home, it can be very powerful to just write a check for it. Also, if your triplets are getting ready to enter that private college that they have worked so hard to get into, you may need a ready source of cash available.:-)

As far as equity lines of credit go, just like everything else, it can be good or bad. One other note to be aware of, most home equity lines of credit have an adjustable rate. Just make sure you do your homework BEFORE you sign.

The other type of debt consolidation loan is what's called a closed end 2nd mortgage. This is a loan with a fixed interest rate for a fixed amount with fixed payments and a fixed repayment schedule. If you have any difficulty controlling your spending, this is the type of debt consolidation loan that you will want.

It's usually a little higher rate that a line of credit and it's also a higher rate than a new 1st mortgage, however, it serves it's purpose. It combines your unsecured debt into one lower payment and is usually tax deductible. It also has a fixed repayment so you know when you can have it paid off. It is also very wise to take at least a portion of your monthly savings and pay it towards the principal balance EVERY MONTH. So if your debt consolidation loan saves you $300 per month, take an extra $75-$100 and put it back to the balance. It's amazing how quickly this little extra can reduce your balance.

Click here to consolidate your debt!

Or

Get a Home Equity Loan to consolidate your debt.

I also always recommend to my customers that you take part of the savings you get from a debt consolidation loan and invest or save it EVERY MONTH. If you do not have any savings account, use this money to create one. Taking a portion of this savings when you have an emergency can help you avoid getting back in the hole. This is the whole idea of a debt consolidation loan, to help improve your finances. If you start saving just a little bit every month, next time the car breaks down or you need to pay for your kids hockey or cheerleading, you won't have to charge it.

The other option that is available is to get a debt consolidation loan by refinancing your first mortgage and getting "cash out" to pay off debt. This is a good idea if your current first mortgage rate is above the going rate. Say you have a 7% first mortgage and $20,000 in debt you'd like to consolidate. If rates are currently at 5.75%, this may be a very attractive alternative. However, make sure that you don't borrow more than 80% of the value of your home. If you do, you will be required to pay private mortgage insurance(PMI). This is insurance that protects the lender from loss in case you default, but you are the one who pays for it.

Click here for a cash out Refinance

In cases such as this, with PMI, it may make more sense to get two loans. A new first mortgage at the lower rate with as much cash out as possible without having to pay PMI. And then a second mortgage to pay the remainder of your debts off. Even with the higher interest rate on the second mortgage, it may still be a better alternative than paying PMI. Have the loan officer or mortgage broker crunch the numbers and compare the two different scenarios to see which is best for your situation. But don't forget to include the difference in closing costs as well. Since there are two loans involved, there will be two sets of closing costs as well. However, make sure the closing costs on the second are MUCH LESS than the first.

For more information on closing costs, click here.

Now what if you have BAD CREDIT?

That is a very good question.

For information on getting a mortgage loan for bad credit, click here.

I go into it in much more detail there, but if you have bad credit, the most important item to consider is to shop around for someone that you are comfortable working with and has a variety of debt consolidation programs available. There are certain companies that specialize in debt consolidation loans for bad credit. They may take some looking, but if you find the right company, it will be worth it. The other option that is available for you is a debt consolidation company.

Click here to apply for a Bad Credit Home Loan

For a second opinion on getting a debt consolidation loan with bad credit, click here.

For information about Debt Consolidation Companies and how they work, click here.

Sometimes, if you know that you've had credit issues in the past, it may not even seem worth the trouble to complete a mortgage application. My recommendation is don't. Call me directly instead. I can take some basic information over the phone and usually have a fairly good idea as to what I can do for you. If you do happen to reach my voice mail because I'm on another line or in an appointment, please leave me a message with the best time to return your call. You can also send me an e-mail as well. I will do everything within my power to contact you at the appointed time or as soon as possible. My contact information is at the bottom of this page. Please do not think that just because you need to leave a message that I am too busy to talk to you. I make my living by talking with people who have all sorts of credit and financial issues and I want to hear from you.

Another fantastic resource is a book entitled "Yes You Can Get A Mortgage: Even if You've had a Bankruptcy, Foreclosure, or Other Credit Issues". This book is written by Brian Sacks who is a specialist in the area of "less than perfect credit" mortgages. I personally subscribe to many of his philosophies and techniques. In his book, you will get 1. Accurate information rather than common misconceptions about getting a mortgage after experiencing credit problems, 2. You will know as much as many loan officers about how to go about getting a mortgage loan when going through the mortgage application process, 3. You will understand what a loan officer is talking about when you sit down with him or her, and 4. you will have greatly increased your chances of getting an affordable mortgage. I can't recommend this book highly enough for anyone who has experienced credit problems in the past. If you put the principals into practice that the book recommends, you will pay for the price many, many times over. And once you have the knowledge, it's yours. You will have the confidence to know that you talk intelligently with mortgage professionals and not get taken advantage of. You can also use you new found knowledge to help others who might be experiencing the same issues that you once did.

Learn more about Yes You Can Get A Mortgage by clicking here.

Lastly, I want to mention closing costs. Closing costs can add up in a hurry if you are not very much aware of what you are being charged for. This is especially true for debt consolidation loans for bad credit. It seems that some companies think that you need them more than they need you and can charge you whatever fees they want. The bottom line is be aware of what the closing costs are and don't put up with excessive fees. Make sure you receive a GOOD FAITH ESTIMATE at the beginning of the loan (it's federal law after all, that you receive a good faith estimate - as well as other disclosures - within three business days after you apply for the loan).

For information on closing costs. click here.

To summarize our discussion on debt consolidation loans, for some people, they can save your financial life. For others a debt consolidation loan may just prolong the inevitable financial train wreck. Learn all you can about the different kind of debt consolidation loans available and then make the decision that you feel comfortable with.

Click here for a cash out Refinance

To summarize our discussion on debt consolidation loans, for some people, they can save your financial life. For others a debt consolidation loan may just prolong the inevitable financial train wreck. Learn all you can about the different kind of debt consolidation loans available and then make the decision that you feel comfortable with.

Please feel free to contact me directly with any questions about the information on this page or any other part of this site: