Debt consolidation is a popular credit card debt help option for consumers who are looking to free themselves from overwhelming credit card debt . As a form of debt relief, it is perhaps the most well known solution for debt problems; it is historically the oldest and most familiar form of payment assistance. There are two types: secured and unsecured debt consolidation. And while debt consolidation may be the most familiar debt option, it may very well be ineffective for a majority of debtors under a number of circumstances. The following questions and answers will hopefully provide consumers with sufficient information surrounding personal consolidation.
Q: What is secured debt consolidation?
A: Secured consolidation, most often in the form of a home equity loan, is the process in which the consumer takes out a second mortgage and borrows money from a bank against the equity in their home.
Q: How exactly does the bank pay off my creditors with secured debt consolidation?
A: The bank uses the money from the home equity loan to pay off your creditors with a lump sum payment.
Q: How does the debtor pay the bank they received the debt consolidation loan from?
A: The bank will set the debtor up on a monthly payment plan over a fixed period of time that the debtor must follow to pay back the loan. The monthly payments the debtor makes to the bank are equivalent over that time and usually with reasonable interest rates. Unfortunately, some consumers who take out secured loans complain of high monthly payments are often considerably high or stretched out over such a long period of time that becoming debt free is difficult.
Q: What happens if I can't pay back my secured loan from the bank?
A: Since the debt is secured, that essentially means you have placed an asset down as collateral in the event you can not afford to pay off the loan . As a result, the bank has the right to that property and you ultimately lose whatever you have attached as collateral. For example, with a second mortgage, if the loan is not paid the bank can foreclose on your home. Clearly this is why secured debt consolidation comes with a heavy risk.
Q: What sort of an impact has the mortgage foreclosure crisis had on this credit card consolidation option?A: Due the mortgage and credit crisis, qualifying for these types of loans has become much more difficult. Until this happened, however, many people were using this method to consolidate their credit cards and in hindsight, it may not have been the best solution for their situation. Many people who did "cash out refinancing" on their home subsequently lost their property when payments became too much to handle. As advised throughout the site, "Robbing Peter To Pay Paul" is a dangerous solution for people who are seeking credit card help.
Q: Why were (and are) so many Americans having problems with their payments?
A: Many of the mortgage loans that were being offered had adjustable rates and initial teaser rates that, once expired, would increase the interest charges on the loan tremendously, oftentimes making them unaffordable for the consumer. In other cases, aggressive lenders willingly extended people loans when their income could not feasibly support it.
Q: How can I apply for a secured consolidation loan?
A: You would contact a local bank and fill out a secured loan application.
Q: Is it difficult to apply for a secured consolidation loan?
A: There are a number of circumstances in which applying for a secured loan to consolidate your credit card debt would be difficult. For
starters, if your credit has been damaged at all in the past, banks will be very hesitant to give you a secured loan because they may perceive you as
financially unreliable. In addition, if you are asking for an unreasonable amount of money for the secured loan, your credit report would have to be nearly flawless for a bank top grant you that loan. And finally, if the equity of your property is not enough for the bank to secure a loan with then you typically will not be granted that loan.
Q: So, if my assets aren't worth much, and I don't have at least an average, steady income, is a secured debt consolidation loan my best credit card debt help option?
A: If these are the circumstances you are experiencing, then a secured debt consolidation loan is certainly not your best option to relieve yourself of
your credit card debt. It is highly unlikely that you could pay back the loan if it were even granted to you in the first place (which is also unlikely under these circumstances). I suggest considering your other options, such as debt settlement consolidation, which you can research on our website with our additional resources.
Q: What is unsecured debt consolidation?
A: This involves a process in which the bank pays off a portion or all of the debt you owe; in turn, the consumer pays back the bank with (typically with very high interest) on a monthly payment basis. This is also used loosely to refer to credit card debt counseling and debt settlement programs.
Q: Can I lose any property if I am unable to pay off the loan in the set amount of time?
A: Since the loan is considered unsecured, that means that the debtor has attached no collateral or property down in the event the loan cannot be paid off. Essentially, it is unsecured for the banks because they cannot, for example, foreclose on your home if you don't pay the unsecured loan back.
Q: How does taking out an unsecured loan to pay off my credit card debt affect my credit?
A: If you take a bank consolidation loan, future lenders will (may) view you as overextended and therefore you will be considered less financially trustworthy. As a result, applying for loans in the future will (may) be difficult. In addition, if you fail to make the payments back to the bank on time, or cannot eventually pay off the loan in full, this will have an adverse effect on your credit score and credit report.
Q: Are credit card debt consolidation programs the same as consolidation loans?
A: No they are not. Credit card consolidation programs do not lend their clients any money. Instead, they negotiate with your creditors to lower the amount of debt that you must pay back to settle your balances. (or interest rates like credit counseling)
Q: What are my debt help options for consolidating my unsecured debt?
A: There are several options you can choose from to consolidate your unsecured loans. Debt settlement and negotiation is one debt help option
that you have. This is the fastest and most cost effective approach to settling your credit card debts. Credit counseling is another option. Credit counseling companies work to lower your interest rates with your creditors. A secured and unsecured consolidation loan, as discussed above, involves the process of taking out a loan from a bank to pay off your credit card debts. And finally, if the circumstances call for it, filing Chapter 13 is a last resort debt help option in which consumers can consolidate their unsecured debts.
Q: Can the interest from bill consolidation loans be deducted from my IRS income taxes?
A: The interest from secured debt consolidation loans involving a home as collateral is indeed tax deductible.
Q: What is my best option for consolidating medical bills?
A: Typically your best option is to work with a debt settlement program or to take out a consolidation loan with a bank to pay off any medical bills
you may have. Unfortunately, the monthly payments on hospital bills tend to be unreasonably high, so make sure you consider all of your options before making a decision. Considering the fact that you could potentially lose your property by missing a payment, this avenue should be avoided if possible.
Q: What if, after converting my unsecured debt into secured debt, I want to file bankruptcy to clear my credit card debt?
A: Filing bankruptcy after making this conversion will not help you at all. Since the debts at that point would be secured, bankruptcy would provide no further incentive than the situation you currently face because you would potentially lose your home.
Q: Does it make sense to consolidate my credit cards if the interest rates are going to remain the same as before?
A: Typically if your interest rates are going to remain the same then consolidating your personal debt is not your best option in paying off your
credit card debt.
Q: Does bankruptcy or debt consolidation loans affect your credit worse?
A: Typically nothing affects your credit worse than either chapter of bankruptcy . Filing Chapter 7 Bankruptcy remains on your credit report for 10 years and your court records for 20 years. Filing Chapter 13 Bankruptcy remains on your credit report for seven years and your court records for 20 years. Due to these facts, there is a catastrophic affect on your credit and many people struggle to ever bounce back from that affect. Debt consolidation loans on the other hand do not to negatively affect your credit score, although certainly if your debt-to-income ratio is suffering, this debt relief option will not help it.