Consilidating debt closing business
“If the principal is paid down faster [than it would have been without the loan], the balance is paid off sooner, which helps to boost your credit score,” says Freeman.
If the same individual were to consolidate those credit cards into a lower-interest loan at an 11% annual rate compounded monthly, he or she would need to pay $932.16 a month for 24 months to bring the balance to zero.They also tend to have higher interest rates and lower qualifying amounts.Even so, the interest rates are still typically less than the rates on credit cards. “Typically, the loan has to be paid off in three to five years,” says Harrine Freeman, CEO and owner of H. Freeman Enterprises, a credit repair and credit-counseling service in Bethesda, Md., and author of “How to Get Out of Debt.” These types of loans don’t erase the debt; they simply transfer all your debts to a different lender or type of loan.This works out to $2,371.84 being paid in interest.The monthly savings is $115.21, and over the life of the loan the amount of savings is $2,765.04.Secured loans are backed by an asset of the borrower’s, such as a house or a car, that works as collateral for the loan.
More traditional, unsecured debt consolidation loans, which are not backed by assets, can be more difficult to obtain.
These loans are usually offered by financial institutions, such as banks and credit unions; there are also specialized debt-consolidation service companies.
There are two broad types of debt consolidation loans: secured and unsecured.
“If you can get your bank to approve a loan, that’s great," says Tim Gagnon, assistant academic specialist of accounting at the D'Amore Mc Kim School of Business at Northeastern University.
"But your bank may not be looking to keep you as a client and your credit scores may not be high enough to meet their lending requirements.” If you’re turned down by your bank or credit union, Gagnon suggests exploring private mortgage companies or lenders.
Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.