Reduce Debt Increase Wealth

Loan Consolidation

December 18, 2022 MIsterchuck Season 3 Episode 144
Reduce Debt Increase Wealth
Loan Consolidation
Show Notes Transcript

What is loan consolidation should it be done and how it is done. Will give another way to reduce debt if unable to get loan consolidation1. 

Article Link: 

https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861 

Contact: ReduceDebtIncreaseWealth@Gmail.com
Wanting Budget Spreadsheet Place Spreadsheet as Subject
All other inquires place topic into Subject.

Charles McDonald:

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction, to achieve financial freedom takes commitment, confidence, determination, loan consolidation, what is loan consolidation should it be done and how it is done, we'll give another way to reduce debt if unable to get a loan consolidation. I'm assuming that people listening to this episode are working on getting their debt under control. The first things you need to do is to identify if you had a spending problem or what caused your debt. And once you identify that, and you start tracking, all your spending and your income, through your checking your check your credit cards and your savings account. And you've done that for a couple months, and you got your category set up and you set up a budget or your control panel. So you know where your money is going. And you worked on getting your debt under control. You identify places where you're spending money where you don't need to, you've done away with that, and you're making some progress. Perhaps you'd like to get out debt a little bit faster, you're probably have heard people say, Why don't you get a loan and pay off all your credit cards? Well, I say why didn't you get a loan and pay off all your high interest loans. And that's is referred to as a loan consolidation. loan consolidation is where you borrow money to pay off other debt. If you're following my debt reduction plan, you know, the first thing is quit creating new debt, and then make the minimum payments on all your debt, get your emergency fund established and set up and funded. And then you take all the money in excess of your emergency fund, and you apply it to your debt. While some people might be in a hurry, or you might think it's easier to get a loan consolidation, what you need to look for, and when you're considering this is how much interest you're paying on your other debt. So when you get a loan consolidation, you need to make sure the interest rate is gonna be lower than your credit card debt, or any of the loans that you're paying off. That's step number one. If you have good enough credit, you may be able to get a personal loan to pay off all your credit cards in that high interest debt. Now, just a note, if you're thinking about paying off student loans, he may want to put that off and reconsider that. Because if the government allows loan forgiveness on your student loan debt, if you refinance it into a personal loan, you won't qualify. Remember, this loan forgiveness is only going to be $10,000. Or if you have a certain type of loan, it could be up to $20,000. Also, once you get that loan forgiveness, that may become income to you, that has to be reported on your tax return. Because all loan forgiveness is taxable income to you. So just a note there. So we're going to handle this assume you've got a payday loans, maybe in two or three credit cards and you're paying 17 25% rate of interest. So you need to look for a personal loan, where you can get less than 10%. You could go as high as 12%. But make sure that the loan never exceeds the interest that you're already paying because it won't do you any good. If it does. And most of these lenders are going to require you to blows out loans credit card accounts that they're paying off. And maybe we don't want to do that. Because when you apply for this personal loan, that's gonna hurt your credit score and it's going to be on your credit rating for one year. When you close those credit cards, because they're paid off, and you close them down, because that's what the lender wants you to do, because they don't want you to be overspending, they want to make sure you're able to pay them back, every time you close down a credit card, that's gonna hurt your credit score, because you're gonna have less available credit. So let's say you have three credit cards, he have $15,000 balance, you've been carrying on all three of them, and you're paying 19% interest on all of them. Well, if you pay all those off, you're gonna borrow money, it's gonna be $45,000. And even though you might have a 10% rate of interest, when they close those credit cards, you're gonna have less available credit. And that's gonna hurt your credit score for probably maybe a year or two, I'm not sure how long that it will hurt your credit score. With all that considered? What? How are you gonna do it? Well, the first and easiest way is get a personal loan, if you have a good enough credit, and you can get a personal loan, then that would be the way to go. Another way to do a loan consolidation is to maybe get a line of credit on your home, it may be a much lower rate of interest, your house is now going to be at risk. If you're unable to make the payments and they foreclose on you, you could lose your home, and then you won't have any place to live. So that I don't recommend one, using a line of credit to pay off your credit card debt. I don't recommend refinancing, especially now, if you have a mortgage rate that's lower than what the current mortgage rates are, you do not want to refinance it because you don't want to go to a higher rate, your home is probably the largest amount of debt you have. So you don't want to increase the rate of interest you're paying on that no matter what. So let's concentrate on a personal loan, go out and get a personal loan, and maybe the credit the lenders say you got three of these credit cards, they might want you to close two of them. He gotta be where is this rate to town you introductory rate? Or is it a fixed rate, meaning it's gonna be the same no matter how long as long as you have that loan, you're gonna pay the same amount of interest, that's what you're looking for, you're looking for a fixed rate, where you pay the same amount of interest is not going to go up after six months or a year, or whatever they're trying to sell you. You just want a fixed rate set and not change and make sure that interest rate is lower than what you're already paying on your credit cards. With all that said, I have a link in my show notes to an article, consumer finance.gov. What do I need to know about consolidating my credit card debt, because that's what we're focusing on? Well, the first thing before you take out the loan, you need to have a debt reduction plan in place. So you already should be tracking everything that you're doing, you should have a control panel, they call it a budget. So if you go to a monitor Tom, you have a budget set up that you're following very closely, you identify things that you're paying for you no longer use, you clean all that up, and you got everything set down to the bare minimum of what you need to pay on a monthly basis and that you have enough income to pay this particular loan. This loan monthly payment might be five $600, which may be more than the minimum payment of the three credit cards you're trying to pay off. So make sure that your total loan payment does not exceed the minimum payment on what you're trying to pay off because not gonna do you much good. Also tell the lender that you have an emergency fund set up. It's fully funded up to X amount higher, the better that you have set aside that you don't want to touch in order to make sure that you no longer have to keep using it Credit. And that's force if something would happen, that's not within the normal monthly payments that you are doing. Cover your needs housing, transportation, food, clothing. And if you have a number that you can tell them what that is, you may be you can impress on them, that you, you identified your problems, you're working on getting out of debt, and you just learn looking into getting the loan consolidation to try to make it easier because you have less payments to make at a lower rate of interest. And the article tells you to make a budget and types of loans and what you should know well, personal loan is one of them. And using your line of credit, it'd be a second one, a third one would be to refinance your mortgage, and start all over and pay off all your debt all your other debt, it's important that once you do all that you still quit creating new debt, he may have two or three credit cards with zero balances. But you can not use them, you have to treat them like cash, and only charge on a credit card, what you can't afford to pay off every month. With all that said, it seems simple. So what are you going to look for, if you need to find a lender, that's gonna give you decent terms, you want the lowest possible rate of interest, you want the monthly payment that you can handle fairly easy. So that would then dictate on how long the loan will be, maybe you can handle pan off $750 a month. And that loan could be two and a half years. Or maybe it's $500 a month, and might be a four year loan. But whatever it is, do not stretch out your budget in order to pay this one loan. When I mean, what I'm talking about is, once you have enough money to pay your mortgage, pay your car payments, and pay this loan, he should have enough money available to meet your other needs your food, your gas, your car repairs, and your clothing. If you can't do that, I would not recommend getting this loan consolidation. I'm going to talk about later. And my final thoughts. The final way, you can use your credit cards that you paid off to get a zero interest for six months or one year or 18 months. So that you can apply more to your debt and get out of debt faster. And I'm going to cover that at the end of this episode. It all sounds fairly simple. But then when you go to apply for the loan, you need to have your numbers with you print out your budget, and print out your last month of your detail of your category by category of your tracking and take that with you. So you can show the lender that you're making an effort. If you stick to my debt reduction plan, and you're not in a hurry, you can get your credit cards and all your debt paid off without doing a loan consolidation. I never did a loan consider consolidation. I paid off $135,000 worth of debt, and three years, eight months. And I never got a loan consolidation. I just stuck to my plan. Watch where I was spending my money. Try them minimize my spending as much as possible that I didn't go without anything I wanted. But I just made sure I had the money to pay for it. When I bought the item they want it no matter what it was. If you're just getting started, and this is the first episode you listened to. Let me go over the basics of my debt reduction plan. And the first thing is you want to quit creating new debt as I mentioned earlier, you want to make the minimum payment on all your debt no matter how much it is. Need to have an emergency fund which is nothing but a savings account when You put money in, and you need to build that up to at least $1,000. And then over time, as your debt comes down, your emergency fund is gonna grow. And once you have an access, and your emergency fund assets over the minimum amount you want to keep in there, let's say it's $1,000, you build it up to you have 3000, that gives you $2,000. And you apply that to one of your debt. And the way I would do it is the very first one I would pay off, but it's the one with the lowest balance. And there's a reason for that. And then add do these keep doing the same thing over and over and over. And then you get another two or $3,000, extra build up. And remember, as long as that money is in your emergency fund, like this gives you a larger emergency fund until you take it out and apply it some debt. So if something would come up, in the mean time, before you apply it to the debt, you have the money available to cover that emergency fund. So rule number one, you're still not creating new debt, got to keep that in mind at all times. And then you want to start applying an app to that first credit card as a zero balance, he wants to apply the extra money, this excess money in your emergency fund is what I'm referring to, to the highest rate of interest. And keep doing that until you have that particular debt paid off, and then you go to the next highest and then when that's paid off, you go to the next highest. And you keep doing that over and over and over. At the beginning, this is gonna be a fairly slow process, you don't want to get in a hurry and think, Well, if I get a loan, that loan consolidation, I can pay all those off, I'll be ahead of the game, but you're gonna have a new loan at the beginning. So at the beginning of every loan, you're gonna pay most of the payments gonna be interest, I mean, you can keep doing the same thing and apply the extra payment to that loan, and pay it down. And which will reduce the interest you pay over time, he got to make sure when you do get that loan that you can pay it off early that I forgot to mention that earlier. So you're looking for a low rate of interest, you're looking for terms that you can afford to easily pay within when no matter how long it would be, then any money that you get above your minimum amount in your emergency fund, you apply it to the principal only. And then that will reduce the amount of interest you're paying and speed up the time to pay it off. Make sure that you can pay off that loan early. If they have early payments, for paying it off early, then don't do not get that loan look somewhere else. He might pay a little more interest somewhere else, but they allow an early pay off, you'll be better off in the long run. Because if you stick to the plan, and you track all your spending, and you keep it under control, and you have a control center, or a budget, and you know what's going on, you can even if it's a five year loan, you may be able to get paid off in three years. And if they're gonna charge you a penalty for doing that, you're not going to be saving any money. Our goal here is to pay the least amount of money to these lenders as possible. And their profit is charging you penalties for late payment or early payoff and the interest that they charge you is how they make their money. I'll be back in one moment with my final thoughts. If you're interested in learning about an online software that help myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt and even tells you how much and when to transfer money into your savings account and how much and when to transfer money to your debt and which debts to pay off in order. First. It's not cheap. It's a one time payment. But it will definitely be an investment something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase wealth@gmail.com. And I'll send you the information about this online software that worked great for me. Okay, I talked about paying off a credit card earlier in your debt reduction plan, and you don't want to close it. And the reason you don't want to close it is because within a few weeks or months, after you get a zero balance, they're gone to offer you a balance transfer, where you can transfer the balance from another credit card to that particular credit card, and are not going to charge you interest for six months, 12 months or 18 months, longer, the better. So what you want to do is if you have that situation, is transfer the balance of the amount of money that you can pay off, and that same time period, and then you want to get that down to zero, again, they're gonna offer you another balance transfer. So you'll be able to reduce the interest you're paying on those higher interest cards by transferring two or $3,000, over and maybe even 4000, over and until that zero credit card, and then you can make the minimum payment on there. And then when you get the money in excess of your emergency fund, and you transfer money to pay off the balance, you can apply it to that card first. But you don't want to do that until you're close to the end of your free interest. So if you just did it a month ago, and you transfer, say $5,000, and you're getting zero interest, does that make the minimum payment on it, and for at least three quarters of the time that you're getting a free interest. So if it's a year, it's at least seven months, seven to eight months, you pay the minimum balance, then when you get close to the end, where it's gonna start charging you interest, then you when you do your balance transfer, you want to pay that particular credit card off. So maybe at the six month mark, you transfer two or 3000, you got it down to below half, and then another month or two later, you can transfer the remaining amount and pay it off. And then any excess goes to the high interest rate cards. I hope that makes sense. So you're using what they give you to your advantage, you want to have as long as possible to zero interest on that credit card and carry a balance on it while you're paying down your higher rate interest cards first, then when you get close to the end of the time where they're going to give you zero interest use then start applying the money to that card so that when you come to the 12 month mark 18 month mark, you have enough money that you can transfer enough money enough times to get it to zero before they start charging you interest. If you pay it off super early, you're not going to have the advantage of having a free loan. Because that's basically a free loan. They're giving you the use of that credit and they're not charging you anything and it won't cost you anything as long as you make the timely payments, the minimum balance timely payments and get it to zero before they start charging you any interest. And then that during that period, you're concentrating on paying off a high interest rate credit card. So let's say you have three at 15,000 and you have one credit card with $1,000. You paid off that 1,001st You have a zero balance. A couple of months go by you get an offer in the mail. You can transfer money to that card and get 18 months zero interest and this is only an example. You do pay a 3% transfer charge. So 3% of what you pay for the dollar amount that you're putting on that card 3% of it is going to be a fee. You pay that off right away. A, so you only have the outstanding balance that you transfer on there. Generally speaking, when I was doing that, I would save enough money on the interest, I didn't have to pay so that that transfer fee was paid off probably two or three months. So you want to keep that balance on there for at least, that length of time, or perhaps longer, because you want to use the free money that they're giving you the free credit that they're allowing you to use for the maximum amount of time that they are offering it to you. And then you can concentrate on reducing those higher interest, credit cards or loans, whatever they may be, this works great for credit cards. And it's easy to do, because it's all you can go online and do the transfer online. And then when the high credit card balance is a lot lower, you're gonna start paying lot less interest, and you're gone, that principle is gonna go down faster. So that high interest credit card is gonna get paid off a much faster than if you did nothing. So that is loan consolidation. I only recommend a loan consolidation. If you have great credit, good credit, you don't have any trouble getting that you have the fortitude to quit using those credit cards. And they allow you to leave one or two of those credit cards open. So that you can get that free offer have no interest for that length of time that they're offering it. Hopefully, that all works out for you. And you can stay focused on your end goal is your end goal should be getting your credit cards paid off first, oh, you're Hi, loans paid off first, then maybe some car loans paid off, maybe your line of credit on your home paid off, maybe a second mortgage paid off. And then finally, your first mortgage. Do not refinance your home to pay off these credit cards. Because if you really if you financed the home a year or two ago, you have much lower rate on that long term mortgage. If it's a 30 year mortgage, and you're paying 4% or less, and you refinance, you still might have a 30 year mortgage that might be costing you a 6%, maybe even 7%. So you're not gonna be getting ahead any because you're gonna get online on the higher rate on your mortgage. So you do not want to do that. Only do a personal loan or use a credit card was a zero balance. That gives you an offer of a balance transfer, generally three to 5% I only paid 3% on all mics I had decent credit and then concentrate on getting the high interest credit card or loans. Pay down and you'll be glad you did. So