Debt consolidation best practices

admin — Sat, 18 Jul 2009 05:56:26 +0000

Debt consolidation entails taking out one loan to pay off many others. This is often done to secure a lower interest rate, secure a fixed interest rate or for the convenience of servicing only one loan.

Listed here are some debt-consolidation best practices.

If you own a home and has some equity in it, take out a home equity loan. A home equity loan has a fairly low interest rate as compared to most. Another advantage is whatever you do pay is tax-deductible.

Do a cash out refinancing. Another option for those with home equity is refinancing your property for greater than the amount you owe and using the extra cash to pay off debt. The downside of this is that the total interest cost over three decades can be pretty huge.

Get a personal loan. If you have reasonably undamaged credit, you may qualify for an unsecured loan. This option may be a long shot for some but if you do get it you might be rewarded with a fairly reasonable loan evaluation.

Refinance your car. You might not think about this option but it is a secured loan and you can borrow against it. The downside of this is that the car may be so devalued long before you are out of debt. It’s tough to buy a new car when you owe more than it’s worth.

Equity Finance: A definition Equity or

Credit Card minimum payment will cost you in the long run

admin — Mon, 29 Jun 2009 15:15:56 +0000

To better understand why paying the minimum can be so costly it is important to learn how the minimum payment is calculated. For an example let’s take a look at a credit card with a balance of $1,000 that has an APR of 18%. When you break the APR down to twelve monthly periods you end up with a 1.5% finance charge per month. For this example we will also use the assumption that the card calculates the minimum payment by 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the card’s APR of 18% or 1.5% per month that means of that $25 payment only $10 is being applied to the balance while the other $15 is paying that month’s finance charge. During the next month your remaining balance is now $990 so your next minimum payment would be calculated as $24.75 ($990 x 2.5%). For this payment $14.85 covers that month’s finance charge while $9.90 is applied to the balance.

As you can see above, you have made almost $50 in payments yet only reduced your balance by $19.90. If you were to continue paying only the minimum and the features of this card remained unchanged it would take 153 months or almost 13 years to pay off a $1,000 initial balance. This would result in paying $1,115.41 on just interest alone, more than the amount of the original balance!

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the finance connection » Debts

Debt consolidation best practices

Credit Card minimum payment will cost you in the long run