Not all consolidation loans are the same

This was originally published on Monday, August 12, 2013, in the Pacific Daily News.  Click here to subscribe to the PDN.

Consolidation loans can be a way to get out of overwhelming debt. It can improve your credit score and lift an emotional burden.

Not all consolidation loans are the same. It is important to shop around for the lowest rate possible, research all your options, and know exactly what you’re getting into.

Consolidation loans can lower the amount of interest paid, lower payments, and can help you repair your credit score. If the interest rate is low enough, you’re paying more on the debt and less on the high interest rate.

Know how much you owe by adding your debt and interest rates. Visit several financial institutions to compare offers. Compare your debt calculations to what the bank or credit unions offered you. While doing your research, answer the following questions:

• What are the terms of the loan? Look for a loan that has a fixed rate and not a variable rate. Know exactly how long the loan is for. Can you make the monthly payments without putting yourself further into debt? Is there a clause in the loan that if a payment is late or missed, the interest rate will increase? Is there a penalty for paying the loan off early?

• Can you commit to staying on a budget? One of the largest dangers with debt consolidation is that many people feel that they are no longer in debt. They pay off their credit cards and then start using them. Debt consolidation does not address the spending problems that caused someone to go into debt. Create a very detailed budget and track where all your money is going. If you have paid off your credit cards, stop using them completely, maybe even cut them up till all your debt is paid off.

If student loans are a major cause of your debt, look into the Pay as You Earn Repayment Plan. In December of 2012, the Department of Education publicized the plan to help college students pay off their student debts with an affordable payment plan that is based on your income. For more information, go to http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn.

Remember that a consolidation loan does not clear debt; it is a tool that is used to make debt more manageable and will assist in resolving the issues that cause the indebtedness. There are alternatives to a consolidation loan. Try talking to your creditors to lower your payments and interest rates, stay focused on getting out of debt, or consider a debt relief firm.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at  moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com

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