Debt-Free Forever by Gail Vaz-Oxlade (best english books to read for beginners txt) 📗

walking around with balances outstanding on dozens of cards, plus car loans, student loans, and other forms of credit, you may need a consolidation loan.

For people who have been chronic credit abusers, consolidation loans work better because they are not “revolving credit.” They are “instalment credit.” The amount to be repaid is set for a specific number of months, at which point the loan will be repaid in full.

GAIL’S TIPS

Once upon a time the only kind of credit you could get was called instalment credit. You had to make monthly repayments that were designed to have that debt paid off within a certain period of time. So you might borrow $12,000 to buy a new car, with the plan to have that paid off in 24 months, so your payments would be about $560 a month. You knew exactly when the debt would be gone, how much interest you’d pay, and how much you were making a commitment to repay every month. And you had to have a good reason for borrowing. Lenders were loath to just hand out money willy-nilly. You had to justify your borrowing, which made you think. Those types of loans are still around; a consolidation loan is one.

Much more popular today is revolving credit. Lines of credit and credit cards are the primary examples. You can borrow money, pay it back, and borrow it again at your whim. You don’t have to explain anything to anybody. You can use it to buy furniture, a car, or a dog. Unfortunately, you don’t have to think too hard or too long before you rack up some debt.

If the bank you regularly deal with won’t help you consolidate, go and ask another lender. Sometimes our own bank takes us for granted, but another bank that would like the biz will cut us some slack. Offer any other business you may have: your retirement plan, your mortgage, your accounts, whatever you have to show the new lender good faith.

Remember, a consolidation loan only makes sense if your interest rate is coming down. If it’s not, you need to find out why. You may have a crappy credit history that is affecting your rate, in which case you’re unlikely to do better elsewhere. But it may simply be that you’re speaking to the wrong person. Lenders don’t have as much discretion as you may think. You may have to ask to deal directly with the branch manager to make your case. If you are a good client with a strong credit history and a decent income, you shouldn’t have any trouble getting a consolidation loan with a decent interest rate. Don’t settle! Demand the most you can get in terms of a low rate. And be prepared to do some serious legwork to find a financial institution that is willing to work with you to help you achieve your goals.

Strategy 4: Refinance Your Rate Down

Paying off expensive debt by increasing your mortgage is one of the more time-honoured ways of hiding debt. Our homes, once the anchors in our wealth-accumulation plans, have become cash cows used to finance everything from vacations to vehicles, eroding our true wealth and leaving us vulnerable to the inevitable downward fluctuation in the value of our homes. Lots of people consolidate using the equity in their homes and then pretend that everything is okay, cuz now it’s a mortgage payment. Isn’t a mortgage good debt? Hey, tell the truth. It’s still consumer credit; it’s just been shuffled to somewhere you don’t have to look at it. And believe me, it’s costing you.

Allison and Peter have been in debt forever. They make more than $140,000 a year combined, but they can’t seem to stay out of the hole. It started with Allison’s two maternity leaves, for which they had nothing saved. They kept spending as if she were pulling in her regular income and ended up using their line of credit to fill the gap. Peter’s truck gave up the ghost, and because they’d been late with some payments, their credit score was low. That meant a higher interest rate on the new truck loan. And then there was the trip to Cancun they decided to take last winter because they just had to get away. All in all, they ended up with $67,960 in debt and the payments were killing their cash flow.

Allison had a great idea. The house they’d been living in for the past 14 years had gone way up in value. They could just fold their debt into their mortgage, which was coming up for renewal, and be done with the worry. They were paying more than 12% on average on their debt, and the mortgage would be at a much better rate: 5.15%. And if they went with a 30-year amortization, their mortgage payments would actually come down. They wouldn’t have those huge payments on the truck or the line of credit anymore, so they wouldn’t run short of money and end up having to use their credit cards to get them to the end of the month. There was no downside.

When Allison and Peter made the decision to refinance using their home equity, they made a smart choice. When they figured they’d be done with the worry, they didn’t consider the high cost of the “peace of mind.” Repaying the refinanced amount over 30 years means the $67,960 they consolidated to their mortgage will end up costing them almost $44,000 in interest!

It makes sense to consolidate on your mortgage to save on interest, providing you put away all forms of credit, learn to live on your current income, and continue to make extra payments against your mortgage to offset the consumer debt you stuck on there. Slap as much on the mortgage as you were paying for debt and mortgage payments together and you’ll not only save money, you won’t add to the length of your mortgage.

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