Avoid High Consolidation Fees
The most common practice in debt reduction is to consolidate all
your current debt on either your lowest interest credit card or
obtain a new lower interest line of credit. This can save you a
lot of money in interest charges during the time that it takes you
to pay off all of your debt. Since for many this is a very
important step to take, it's vitally important that the proper
research is made prior to beginning the debt consolidation. In its
simplest terms, every percentage point that your debt loan has is
equal to $10 in interest per $1000 in principle paid each year.
To begin, you need to compare this to the balance transfer fees
for moving your balance to a lower interest card or consolidation
loan. These fees are typically around 3%. That means if you're
going to pay a $1000 loan off in less than three years, it would
be better to leave the money in your current account rather than
pay the fee to transfer to an account with an interest rate that
is 1 percentage point lower. If you can pay it off in one year,
you would have to reduce interest by a minimum of three percentage
points to make it worth the fee.
Almost all of the wonderful credit card offers advertising 0%
interest for an introductory period come with a percentage
transfer fee. If you can find one that does not, this makes for a
quality way to consolidate your debt and lower your overall
payments so that your can pay it off with maximum efficiency. This
efficiency comes from the fact that during this introductory time,
you are paying down your debt with 100% of the money that you send
to the credit card company. Just be sure that you read all of the
fine print and note that most of these 0% intro offers become void
if you make a late payment or miss a payment.
This becomes even more important with each additional debt that
you are consolidating. If you have three credit cards, a student
loan and a car loan that you are rolling onto a lower interest
credit card or consolidation loan with transfer fees, each of
those 3% charges could add up to hundreds of dollars. This has a
two fold effect as an adversary to your debt reduction goal. Not
only are you now a few hundred dollars further in debt, but you
are paying interest on that new debt as well. This could
effectively wipe out a good portion of the benefit that this new
lower interest rate provides and thus stop you from reducing your
debt at the rate at which you were working hard to achieve.
Just as you should be double checking or triple checking your
budget, looking for another dollar to squeeze out each month so
that you can use to pay down your debt, you need to research the
debt consolidation benefits with the same intensity. You are
shooting your debt reduction plans in the foot if you are not
being as diligent when you check on your consolidation method. The
fact of the matter is that these transfer fees are how some
so-called debt consolidation loans or debt consolidation plans are
profitable to the advisors or institutions that offer them. As
nice as these people or places may seem to be, remember that they
are in business to capitalize on the fact that many people are in
debt too deep and need help to get out.
If the debt consolidation interest rate is enticing, take the time
to check the fine print. Especially look for other fees that are
not spelled out clearly upfront. Also be careful to note if there
is a prepayment penalty, the worst thing you can find in a
consolidation contract if you're trying to reduce your debt. This
is a penalty for paying a loan off early, kind of like a guarantee
that the borrower will pay interest for a minimum term. You will
most likely want to steer clear of these in. They completely
contradict the guerrilla payment strategy of sending as much money
as you can each month toward the repayment of debt.
In the end, you need to run the numbers for each possible scenario
to find out if consolidation will save you money. The transfer
fees may not be the deal breaker if the interest is substantially
lower than what you are currently paying, but you won't know
unless you do your research before making the debt consolidation
move.
THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS IS IN NO
WAY GIVING ANY LEGAL ADVICE OR REPRESENTATION. THE INFORMATION
CONTAINED HEREIN WAS COMPILED FROM VARIOUS ARTICLES. FOR ANY LEGAL
ADVICE OR REPRESENTATION SEEK YOUR OWN LEGAL COUNSEL.
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