Who should use debt consolidation loans, scams to look out for in your debt management, how to determine if it's right for you. We all get a lot of junk mail advertising debt consolidation loans.  They tell you to transfer all of your debt to them and all of your credit problems will magically go away by sending only one monthly payment.  In this section you'll learn the difference between consolidation loans, and consolidation plans, and the pros & cons of debt consolidation loans.  We'll also discuss title loans, which you should avoid at all costs, and home equity loans.

If your 23% high interest rate credit card debt and other monthly bills are mounting, your balance never seems to go down.  You'll be in this same discouraging position 5 or 10 years from now.  You'll never break free.  This is because paying 23% APR combined with only making the minimum payment is what prevents your balance from being paid off.  Your strategy in this chapter is to reduce your APR, or remove it completely, and pay down your debt easily so you can be free once more. One thing is for sure, nothing will happen by just you thinking about it, you must act to take control of your finances.  We'll show you how below.

Get Every Single Thing They Tell You In Writing.
If it's not in writing, it means they won't do it.
Accept no verbal promises that are not backed up in writing.

Types of debt relief

There are 2 major tools of debt relief to help you get out of debt.  There's debt consolidation loans, and debt consolidation services.  They are both described here:

Debt Consolidation Loans:
A lender lends you money to payoff your bills.  You payoff all your credit cards and other debt, now your payments have all been consolidated into just one monthly payment to the lender, hopefully at a lower average APR than your current bills. Most debt consolidation loans are given in the form of home equity loans.  Some are personal loans at extremely high interest rates which we don't recommend because you are trying to get out of debt, not deeper into debt. Technically, since you are borrowing more money, you're not really getting out of debt, you just created more debt, but hopefully at a lower APR to pay your bills off faster.

If you have good enough credit and equity in your home, some sites to apply to for home equity loans to reduce your overall interest rate are: LoanWeb, BestRate.com, and Eloan. (Remember, this is not a recommended solution!)

 

WARNING: You should close out all the accounts you paid off with your debt consolidation loan, so you don't run up the balance again.  This way you don't have double the potential for high credit amounts again.

Debt Consolidation Services or Debt Reduction Services:

Most reduced interest rate consolidation programs get you out of debt in 48 months.
These debt management plans help you get out of debt, and are usually for people who need debt help. If you don't have a home with equity or your credit rating is not good enough for a consolidation loan, a good alternative is called a debt consolidation plan.  You can think of consolidation plans as a "bill paying service" that has the influence to work with your creditors to reduce or eliminate your interest and late fees, and agrees to send them your payment every month.  You in turn pay the "bill paying service" a monthly payment which they use to pay off your debts to each creditor, plus a service fee, and maybe some interest if they could not get all of it removed.  This should hopefully cost much less than your total payments before, since most credit cards will drop the interest rate from 21% to 0.  This is what allows you to rapidly pay off the debt.  If you're in bad debt, it's the interest that's killing you in addition to the principle that is owed.  You'll be debt free in good time.

Your key benefits from debt reduction services:

Frees you from high APR (APR is either 0%, or very low).

You only have to write one check per month for all your bills.

You avoid the black marks of unpaid bills on your credit history.

You get monthly progress statements on your debt consolidation.

Once you enroll your creditors can no longer call you.

You can now pay down your debt balances where you could not before.

Credit counselors can assist you and give you advice as part of the program.

Credit card companies are willing to drop the interest rates to 0% to get their money back.

Debt consolidation programs end creditor harassment
Once you enroll in the debt reduction program, your creditors going forward are forbidden to contact you.  They can only contact your debt manager and not you. You send the bill paying company one monthly payment, and they in turn payoff all your creditors a little bit at a time. Usually when the smallest creditor is paid off, more cash is available to be applied to the remaining creditors, paying off those balances even more rapidly. All the companies require your payment in money order form only to guarantee that you'll never bounce a check, because they just forward the funds to your creditors.  If they allowed you to mail in a check and it bounced, you might anger some of the creditors into kicking you out of the program, then you're in trouble, because your interest shoots back up to 23% or whatever it was before.

People who only send in the minimum payment to their credit cards would take 10-30 years to pay them off.  By having a debt consolidation service step in for you and get the interest rate removed, you can pay it off a lot quicker.  As the debt consolidation service pays off the balances of your accounts, they then focus on the remaining accounts and rapidly pay those off.

Notice that no one is lending you money, they are just restructuring your debt, which is safer than consolidation loans.  Don't confuse these companies with lending institutions, they are not lenders.  Usually car loans, home loans, and other secured personal loans cannot be brought into this type of plan because the bill paying service cannot get banks to relax the interest.  This type of plan usually works best on credit cards, gas cards, department stores, etc. (un-secured debt), at the discretion of the creditor.

Some of the "for profit" companies charge between 1 - 5% of your monthly payment as a service fee.  The "for profit" companies usually have up front fees of $600 or more before they'll even take you on as a client.  Sometimes the fee is refundable after 30 days if you decide not to enroll, sometimes you'll lose the fee, and sometimes it's refunded at the end of the program, usually 48 months.  Some salespeople will say your fee is refundable, but you later discover it's only refundable at the and of the program 48 months later, so ask.  If you quit the program before it's over (very foolish), all fees are non refundable.

Most creditors will drop the APR and late fees if it means they'll recover their investment in you instead of writing off a loss, or wasting money on collection agencies.  Usually one requirement of relaxing the interest is that you must close all the accounts that you are consolidating.   You send your payments to the debt management company in cashier's check or money order.  Some organizations can also do electronic funds transfer.  Never send cash, it's not traceable.  With all the accounts the debt management companies maintain, it's hard to verify that all our checks are good, so they all want money orders.

It may appear on your credit report that you are working with a credit counselor or debt management company.  No company can tell you this won't happen.  It's up to the individual creditors to decide whether the information should appear in your credit report.  No matter what your debt manager tells you, they have no control over this.

 Don't ever in a million years consider a title loan on your car.

Car title loans:

Car title loans are loans with your car title as collateral, but the interest rate can be over 200%!  Our stupid lawmakers keep voting down legislation against this high interest because industry lobbyists are very influential.   The lawmakers claim that passing legislation mandating a lower APR would put the title loan companies out of business.  Well gee professor, how do banks survive lending people money at only 18%? Title lenders reel you in promising quick cash telling you your cash problems are going away, but they are actually just beginning. Many people don't realize how insanely high the interest is and cannot maintain the payments.  The type of person that signs up to a title loan is a fool, because if they are so strapped for cash that they'll fork over their title for cash, where do they think they are going to get the cash to pay back this ultra high APR loan?   Many people default after the first month and their car is repossessed.  It's a legalized way for the lenders to steal your car. 

 

WARNING: This is the riskiest type of loan and is designed to steal your car!  Don't do it!

Home equity loans:

Home equity loans are used by many to consolidate debt.  Borrowers  take out a home equity loan to payoff their credit cards, then close out those accounts.  Now they just pay one bank one monthly home equity loan payment with a lower APR than their credit card accounts.  For example, typical credit card and department store card interest rates are 18-22%.  But home equity loan APR can be under 10%, and many might not even have any fees.  Home equity loans will cut the interest portion of your payment in half, which has the effect of paying off your principal much faster than credit cards.  One benefit of home equity loans is you usually get to write the interest off your taxes, making the APR on the loan effectively lower.  If you have good enough credit and equity in your home, some sites to apply to for home equity loans to reduce your overall interest rate are:
LoanWeb, BestRate.com, and Eloan.  But BE CAREFUL!  You cannot write off interest if the loan is in excess of the value of you home.  Which brings up our next point:

DON'T BORROW MORE MONEY THAN THE EQUITY IN YOUR HOME!

Some unscrupulous lenders flood your mailbox with offers.  "We'll lend you up to 125% of the value of your home!"  Wow, you just struck oil!  This is very dangerous oil however, because if you default on the loan, not only do you lose your house, but you still owe the other 25%.   Not only that, you can't write off the interest if you borrow more than the house is worth.  The lenders who offer these risky loans are in it only for their own greed.   Because they are writing higher loan values, they group them together and sell the portfolio to institutional investors, now their hands are washed of it and so what if you default, they made their money and moved on to the next group of suckers.  Oops! I meant to say borrowers. 

Any bank with a conscience will only lend you up to 80% of the equity in your home.  They send out an appraiser to get an accurate value of your house, then they determine how much equity you have in the house, and lend you up to 80% of that value.  This is the safest way to do a home equity loan.  You must evaluate whether an equity loan makes sense for your financial situation.  You have to weigh the APR, and the loan fees if any against the APR of the debt you are trying to eliminate.  Make sure you close out any accounts that you are trying to pay off.  Borrow only enough to payoff the accounts in full.  You might not be able to borrow enough to pay off all your debts, so don't straddle the cash across all your accounts.  Use it to payoff your top rate cards, and close them out.

Real life debt consolidation loan example:

You have a gas card with a balance of $400 at 18%, a Master Card with $6000 at 14%, a VISA with $8000 at 15.9%, and a department store card with $6500 at 22%.  You owe a total of $20,900.   Your local bank charges 12% interest for equity loans and has an $800 loan origination fee.  Your strategy might be to borrow $20,900 with an equity loan from the bank to payoff all your balances, and close out the accounts.  Now you'll still owe $20,900 but at a lower APR of 12%.  Also, at the end of the year, you are usually allowed to write-off the interest you paid, effectively making your APR even lower.   Most equity loans are 15 year notes, so try to send in extra principal every month to accelerate that payoff time.  Make sure your bank allows pre payment and extra principal payments.  Online sites usually have lower rates than banks. You apply online at LoanWeb, BestRate.com, and Eloan and get approved.  Now you are paying one check every month to pay off your credit card debt.  Don't forget to close those the accounts you paid off.

But supposing you only have $7500 equity in your house.  How can you consolidate all your debt with $7500?  You can't, you'll have to choose which accounts to payoff.    The department store and gas card have the highest APR, so shoot for those.  You'll need to borrow $6900 with your equity loan.  There is no reason to borrow more, and you should not either.   Sure you would like to buy down some of the interest with your equity, but if you don't have enough to pay it off and close the account, then there is a very high risk that you'll just run the balance back up again.  Some accounts you can close, then just continue to pay them off, then you're OK using the remainder of your equity balance to buy down whatever you can on the balance.  But we cannot stress the importance enough that you must not let your balances go back up.  Consolidation loans and equity loans are potentially dangerous in the wrong hands because you are adding another channel of credit, so use it wisely, and always be fully aware of what you are doing.

Proper use of debt consolidation loans

Consolidation loans are not for everyone and can be dangerous if you aren't careful.  There's a lot of stupid people who don't pay attention when they consolidate their loans.  Sometimes the interest rate can be higher than the total APR on your current debt.  Some unscrupulous lenders charge an enormous up front fee that they don't go out of their way to tell you about.  Some of these same lenders might even roll the fee into the loan payments so hide it.  If the loan's APR is higher than your credit cards, you'll lose money and should not close on the loan. Don't consolidate just for the sake of consolidating.  The word is misleadingly dangerous.  Your brain tricks you into thinking that consolidation means less.  Most people think consolidation loan means they'll pay less, but that may not be the case.  Consolidation just means that the monthly payments from your creditors will be consolidated into one payment to one consolidation lender.  Basically you can't just borrow your way out of debt (DUH!), you must pay it off.  A consolidation loan should only be considered if the interest rate is less than all the credit you owe AND you close out all of the accounts you paid off.

Don't let lenders trick you into thinking lower monthly payments means less interest.  They could have a high APR and stretch the payments out over a long period of time, which costs you more in the long run.   Car dealers use this trick with car loans.  They hide high APR by stretching your payments out to 60 months, making them seem lower.

Consolidation loans are  DANGEROUS for impulsive people because all you are really doing is shifting all your debt from one place to another, effectively OPENING ANOTHER CHANNEL OF CREDIT, while freeing up your credit cards.  Some idiots then proceed to fill up their credit cards again, now they have double the debt they started with, and they are paying up to 22% on their consolidation loan because they weren't paying attention to the APR when they signed up.  Some consolidation lenders are unscrupulous and make it appear they are eliminating your debt, when you are really taking on more debt. They often hide the APR from you and try to charge up front fees for loans, which is illegal.  They might also offer you a lower payment, but check their math and you might discover that it ends up costing you more than your original bills.  Don't fall for this scam! Always check their numbers.

Some lenders just send you a pre approved check out of the blue, hoping you'll just sign up to their program without doing your homework first.  Here's what usually happens.  You'll get a check in the mail from them for say $3500 with a letter that says:

"Congratulations, attached is your check for $3500 to open your loan account.  Because you've demonstrated your financial responsibility, we've sent you this first check for your new Greedy Bank Credit Line.  Use it to make that special purchase, pay a few bills, enjoy a relaxing getaway, fix your car or home, it's your money, so it's up to you."

Of course if you're smart like we know you'll be after reading DebtWizards.com, you'll scan through the fine print to see the interest rate is a whopping 24%!  You should be asking them why they want you to pay them 24% to payoff bills that are at 18% or lower!  On top of that, you'll also note the fine print states there is an annual fee for participation in this revolving loan program, and fees for documentary stamps and personal property taxes.  Of course you can purchase insurance options as well.  Anytime someone just sends you a check in the mail like that, just rip it up, they are doing you a big disservice.  The only thing they care about is stealing you out of your current debt and dipping you into their 24% APR, riddled with fees that they don't tell you about on the front page of the letter.

Rules to follow when you take out a debt consolidation loan:

NEVER, EVER, EVER, SIGN A CONSOLIDATION LOAN WITHOUT FULL DISCLOSURE IN WRITING OF:

1) The principal amount that you are borrowing.
2) What the interest rate APR will be.
3) How many payments you will pay.
4) Closing costs, if any.

THIS SHOULD BE CLEARLY SPELLED OUT IN THE CONTRACT.  IF IT'S NOT ON THE CONTRACT, DON'T SIGN!

If you don't know how to check their math and verify the monthly payments, don't sign the loan papers, you have no business taking out a loan.  You'll have no recourse later because in court they'll just say "you signed the loan".  Verbal statements or claims made by salespeople do not hold up in court.  There are many unscrupulous "lenders" out there who prey off people who are naive or have bad credit.  They'll offer you the world, lying through their teeth to get you to sign up to their program.

If you chose a consolidation loan instead of a consolidation plan, be sure you use the entire amount of the loan to payoff your accounts, and close all the accounts you are paying off.  DO NOT keep any cash for yourself to spend.  Use all the funds to payoff the debt.  No clothes buying, no dinners, no trips, no nothing.   Borrow just what you need to payoff your accounts.

Some debt consolidators have clauses written into their contracts that say "You agree to hold us harmless....and you will not file any lawsuit against us".  DO NOT sign the contract if this clause is present.  This means they can stop paying your creditors, you get in big trouble, and you can't sue them for it.  Just move on to the next company that does not have this clause.  But this clause is OK if it is qualified with the statement "unless we are negligent or commit a crime..."  Then it means you can sue them doing you wrong.

When you itemize all the accounts you want to be included in the plan, make sure you have all your ducks in a row and give them all the information they need in one shot.  Don't go back to them after they went through all the trouble of determining your monthly payment and add another account to the pile.  They'll have to start over, that will increase your payments, accusations will fly, and it just becomes a big pain in the neck for everyone.  Do your homework first, and send the consolidation company one packet containing everything they need to get started.  Don't spoon feed them information, as time is of the essence.

REVIEW of Debt Consolidation plans

Stay away from losers who don't disclose to you the APR in writing.  You should never in a million years sign any contract that does not have full complete disclosure of all the facts, even if they tell you "Come on, everyone signs this contract".

Don't start a consolidation loan or program unless the APR is less than your current debt.

If you do get a consolidation loan instead of a consolidation program, close all your accounts as you pay them off.

Throw out ALL department store and other retail store cards.  Most are at 18%-23% or more.  Use your ATM card instead.

Never pay just the minimum payment.  It'll take you years 10 to payoff the debt, and cost you even more interest as the balance accumulates each month.  Always send in more than the minimum payment amount, and indicate extra principle on your check for car loans, home loans, etc.

Don't be afraid to seek professional help. It's not a sign of defeat, it's a sign that you're taking control again and you need help.  When you bring your car into a mechanic you're not admitting defeat to anything, you're just going to an expert in the field who knows how to solve your problem.  If you have credit problems you need a professional in the field of personal finance and credit to solve your problems.