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Should You Consolidate Your Loans)-
CREDIT CARDS, student loans, car payments,
mortgages. If you go through a box of checks like a flu victim goes through
Kleenex, you may be a candidate for loan consolidation. You've got lots of
options to choose from, whether it's taking a personal loan from your bank or
credit union or rolling your credit-card balances to a low-rate card. The key is
to reduce your interest rates — not just your monthly out-of-pocket costs.
These days, debt can be cheap and some credit-card companies are charging
single-digit interest rates for their best customers. So if you're paying
upwards of 15% on several credit cards, then consolidating your debt could save
you a lot of cash. Our consolidation calculator will help you figure out just
how much. Enter the current balance on your loans along with the interest
charged, and you'll see how consolidation will affect your overall interest
rate. (Of course, if you take this opportunity to reduce your principal
payments, your new low-interest rate loan could end up costing you more than the
old one.)
What Type of Loan Should You Get?
No matter what, stay away from debt-consolidation scams — you know, those
e-mails you get promising to reduce your monthly payments even if you have bad
credit. "With finance companies, you'll pay as much as 26% in interest and
probably hurt your credit rating," says Gerri Detweiler, author of "The Ultimate
Credit Handbook." Furthermore, they will charge application and handling fees
you wouldn't have to pay otherwise.
If your debt is only tied up in credit cards, then a much better option is to
simply roll over your credit-card debt to a card with a lower interest rate. For
the best deals, check out our credit-card rates page.
But if you're looking to consolidate different types of loans, or if you're
looking for cheaper rates than those offered by credit-card companies, check to
see if you qualify for a personal loan from your bank or credit union. These
loans can be secured (backed by something you own) or unsecured, but with
unsecured loans, "i's going to be difficult to qualify," warns Detweiler.
If you're a homeowner, consider a home equity loan. The interest on these loans
is tax deductible, as long as your loan doesn't exceed the value of your house.
Bankrate.com provides national averages as well as the best rates by state. Just
bear in mind, if you default on your loan, you risk losing what is most likely
your most valuable asset.
And finally, you could also consider borrowing against your 401(k) or other
investments via a margin account. Borrowing on margin to pay off your debt can
be cheap (most brokerages charge you slightly more than the broker call rate,
which these days is 3.75%), but very risky, and we wouldn't recommend it. Why?
Because if the market moves in a way you hadn't anticipated, then that loan
could be called in — pronto.
A Final Note
Once you've found a loan that makes sense for you, be sure to use your new
savings to pay down your principal. And, whatever you do, don't look at your
zero-balance credit cards as an opportunity to indulge. Cancel those suckers
instead!
Once you leave school, you can consolidate all of your federal student loans
into one big debt.
Consolidation is tempting because:
1) It's easier to keep track of and pay one bill a month.
2) The government allows you to consolidate your 10-year student loans
into a 30-year debt, which can cut your monthly payment by about 40 percent.
3) Those who take advantage of the government's special income-based
consolidation plans (which allow low-income graduates to repay just a
percentage of their income) might eventually have some of their loan forgiven.
But before you consolidate, consider the downsides.
1) If you stretch out repayment, your monthly payment will be lower, but
you will be making so many more payments that you will eventually pay tens of
thousands of dollars more in interest.
2) Some federal student loan bargains, such as MOHELA's "Rate
Relief" loans, are much better deals than consolidated loans.
If you decide consolidation is a smart move, here are a
few tips:
1) Check with your university's financial aid office to see if your
school has any special deals.
2) Check with your department head to see if you might qualify for any
loan repayment programs. Those are sometimes open only to graduates who have
consolidated their loans directly with the federal government.
3) Check with your employer to see if you can qualify for any in-house
loan repayment program.
4) Shop for better consolidation deals by checking with nonprofits such
as MOHELA and NHHEAF. Graduate Leverage, a cooperative, is also
offering competitive terms.
5) Once you've narrowed your list down to the best one or two deals, call
your current lender. Students who threaten to consolidate with a company other
than their original lender are sometimes offered extra discounts and rebates to
return. It's worth asking!
6) Beware of
consolidation loan scams. |
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