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Is it time for Debt Consolidation?
Debt to a consumer is like water to a sinking ship. If it's coming in too fast, it really doesn't matter how fast you bail-your ship is going to sink. However, this sad but true predicament can have a happy ending, courtesy of a debt consolidation mortgage, which can rescue your finances like the Coast Guard can rescue you.
Understanding debt consolidation
A debt consolidation loan combines all your outstanding debts into one single loan. You pay interest only on one principal amount, and generally at a lower rate. The bottom line is that you'll have a lower monthly payment, which will help you keep your head above water until your debts are paid off.
Tips for success
Here are some things to consider when thinking about a debt consolidation loan:
Look at your monthly payments. Chances are that you've got a variety of different debts. Maybe a few different credit card balances? A consumer loan or two? There's also a good chance that you're paying double-digit interest rates on those balances. With a debt consolidation loan, you consolidate all those separate payments into one single lump sum, and lower your interest rate into one that's in the single digits.
Budget your expenditures. A surefire way to tell if your ship is taking on water is to make a budget. Is your debt slowly driving you down? Contact a lender and find out how much a debt consolidation loan can reduce your monthly expenditures. If it gets your outflows in line with your monthly income, you know you're in business.
If you think that you're a good candidate for a debt consolidation loan, start checking out your options. Homeowners have plenty of choices, such as a cash-out refinance, a home equity loan, or a home equity line of credit. No matter which instrument you choose, you'll likely find that these loans are the top-notch choices for improving your bottom line and keeping your financial ship afloat.
Now's the Time
The Roman Empire fell in 476, and the Berlin Wall came down in 1989. Every era must end sometime, including the current trend of historically low interest rates that have reduced borrowing costs across the board.
Debt consolidation helps you most when the new financing has a lower rate than the debt that you're replacing. After all, the reason you're consolidating is to lower the overall cost of your debt. You could reduce your monthly payment burden without changing the interest rate, but this would require a longer pay-off period and increased total interest costs-two factors that ultimately work against you.
The best debt consolidation scenario, therefore, is to trade in high-rate debt for lower-rate debt-the lower the rate, the easier the payoff. This fact takes on some added significance when you consider the state of today's economy and the future of interest rates. Since September of 2007, the prime rate has ticked down from 8.25 percent to today's rate of 5 percent. Aggressive rate reductions like this tend to put inflationary pressures on an economy. And, indeed, our economy has shown signs of rising commodity prices. Many experts believe that the Fed will have to end the era of low interest rates by implementing rate increases to combat inflationary pressures.
Domino effect
If interest rates do rise, credit card debt and debt consolidation loans will get proportionately more expensive. Because your credit card balances carry adjustable interest rates, you'll start absorbing those increases almost immediately. Once rates start to tick up, your options for consolidating will be more expensive. An increase of 1 or 2 percent means an extra $50 or $100 in interest for every $5,000 of debt.
Charting a course
To decide if now is the time to consolidate, run an informal sensitivity analysis on your debt. This involves calculating the added interest costs associated with higher interest rates. You'll start by listing out your debts and their respective rates. With the help of a credit card payoff calculator, compute the total interest that you'll pay at your current rates. Then, calculate the total interest you'll pay if rates tick up 0.5 percent. Also examine how a rate increase will affect the time it takes you to pay off your debts.
If you're having a hard time with your debts now, a sensitivity analysis may indicate that a rate increase will push your debts beyond affordability. That puts the pressure on you to implement your debt consolidation solution before the era of low interest rates comes to an end.
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