Reducing Debt
Through Lower Interest Loans
It happens to the majority of us, credit card
debt accumulates and before we quite realize it,
we are carrying a debt load that is far beyond
our means. When this happens, we need to take
immediate positive steps to knock down the debt
as quickly as possible. One of the most
efficient ways to do this is to reduce the
amount of interest we pay by shopping around for
a better rate and having our balances
transferred over. By doing this, we pay more
towards the principal, thereby reducing the
duration of the loan and saving ourselves
potentially thousands of dollars over the
lifetime of the loan.
Typically, a credit card carrying a balance of
$5000 dollars, with an interest rate of 17.5 %
and a minimum monthly payment of $150 would take
you 3 years and 10 months to pay off. The total
interest accrued would amount to $1, 846.
However, if you were to transfer your credit
card debt to a lower interest rate loan of 7 %,
that same $5000 paid in increments of $150 a
month, would be paid off in 3 years, 2 months,
substantially reducing the amount of interest to
just $564. That's a savings of $1,282.
There are several options available for lowering
your interest rates. Each one has its benefits
and drawbacks. By educating yourself, you can
choose the one that is best for you.
Consumer Credit Counseling Service
Consumer credit counseling services offers to
consolidate your debts into one payment,
negotiating with creditors on your behalf to
have late fees waived, interest rates lowered
and loans extended. Counseling Services will
require a 'donation' or payment to cover costs
and handling fees. You need to weigh these costs
to determine if you would still come out ahead
by paying a company to negotiate a better
interest rate for you; a service that you may be
able to do yourself.
Choose a reputable firm that will handle the
consolidation in a way that preserves your
credit scores. Prior to the consolidation, due
dates should be changed to correspond with the
counseling service's payment schedule, since
many counseling services only send out checks
twice a month, on the 1st and the 15th. If these
dates do not harmonize with the due dates on the
cards, they will show up as late payments on
your report. In addition, it's important to
realize that you need to proceed with caution
with these companies because not all are
reputable and many remain unregulated. Watch for
the following signs that may mislead you into
trusting a company you shouldn't:
understand the term "non-profit." It does not
necessarily mean the company is legitimate or
that you will get a better rate. The laws
governing a 'non profit' organization are vague.
Many companies qualify for this title by
arranging finances to indicate that the company
has not profited, while paying their employees
large salaries. To find out if a CCCS is
legitimate, check with the National Foundation
for Consumer Credit (NFCC) and the Better
Business Bureau in your area. Be wary of
companies claiming you can lower your monthly
payments-this is a fallacy. As of March 25th
2004 the last two banks to accept lower payments
discontinued this practice. Question companies
that offer lower interest rates than their
competitors. All creditors work off the same
interest rate reductions and minimum percentage
payments on balances so therefore it is highly
unlikely to have this lowered. Be familiar with
the current interest rates on the cards you
carry and ask that you choose which cards to
consolidate. You already may carry balances with
interest rates that are lower than the one they
are offering you. If so, request that you be
able to exclude those balances from
consolidation.
You have to decide if there is a benefit to
going to a Consumer Credit Counseling Service or
if you can do their job just as effectively
yourself. A consumer can often negotiate with
creditors themselves for a better interest rate.
One option is to shop around for a better
interest on credit cards and to transfer the
balances from the high cards over to the lower
card. Contact your credit card company and tell
them you have been offered a better rate at
another company and if they plan on matching or
beating that rate. If they do not rise to the
challenge then transfer your balances to the new
card. One option for transferring your balances
is to take out a home equity line of credit.
Home Equity Line of Credit
A home equity line of credit is a loan taken out
against the equity in your home, in other words
your home is offered as collateral. These loans
are usually offered at low interest rates. As
with any credit, you should weigh the benefits
and costs before deciding. Bare in mind that
failure to repay the loan, with interest could
result in the loss of your home.
The credit limit on the line is derived at by
taking a percentage of the home's appraised
value and subtracting the balance owing on the
mortgage. The line of credit amount is also
based on your income, credit history and
additional debt load.
The home equity line of credit works on a
variable interest rate, based on the prime rate.
Lenders usually charge prime rate plus a 2
percent margin. By law, equity lines of credit
must have a cap on how much the interest rate
may increase over the life of the plan. Some
also limit how low your interest rate may fall
if there is a drop in rates.
Home equity plans may set a fixed period during
which you can borrow money. At the end of this
draw period you may have the option of renewal,
or if no renewal option exists, then the plan
may call for full payment at the end of the
term.
As with any contract, you must read the terms
and conditions carefully, as many plans have
fees, charges and hidden costs. Some of the
costs involved in establishing a home equity
line of credit include property appraisal fees,
application fees, closing costs and attorney
fees. In addition to these costs, you may expect
to pay transaction fees every time you draw on
the line.
The benefit of opening a Home equity line of
credit is that the minimum payments are low,
often set at just the interest or interest plus
a few percentage points. Be aware that with a
variable interest rate, monthly payments may
fluctuate. If you sell your home you will
probably be required to pay off your loan
immediately.
No matter which option you choose, the main goal
should be to reduce those high interest rates
while paying the lowest penalty for doing so.
Weigh the pro's and con's of all options
carefully and choose a road that best suites
your financial situation.
Stay Informed
It is important to stay informed about your
credit before you apply for any loan. An
excellent way to begin taking control of your
financial future is to obtaining a copy of your
credit reports before you see a lender. Today
you can get your free instant credit reports
from the major 3 credit report agencies online.
This way you can see exactly what the lender
will see. When obtaining your credit reports,
you will want to make sure you get your credit
report scores as this is what lenders base most
of their decision on. The higher your credit
score the lower your interest rate will be and
vice versa. So be a wise consumer, get you’re a
copy of your credit report and reduce your debt
through lower interest loans.
This article is the property of
www.1st-in-homeloans.com, which has been
offering home mortgage services since 2002. To
find out more visit
www.1st-in-homeloans.com
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