The Lottery is Not a Viable Debt Consolidation Program

A Credit Article Contributed by Mark Mcclelland

Wining the Lottery is Not a Viable Debt Consolidation Program

Consolidation Debt Program - Wining the lottery is not a viable debt consolidation program

Option Abound for Debt Consolidation Programs, but Some are Better Than Others

Just as praying does not constitute a reasonable stock market investment strategy, buying lottery tickets, hoping for that big score, does not constitute a viable debt consolidation program. Although it certainly would be nice - paying off all your debts in one fell swoop and than living like a king for the rest of your life - the reality is that most things in life, including debt repayment, don't actually come that easily.

If your goal is to pay off your debts in a reasonable amount of time by finding a decent debt consolidation loan, there are a couple of points to keep in mind: first is that simply trying to find the lowest interest rate won't necessarily provide you with the most benefit, and second, develop a re-payment plan that will pay off your consolidation loan within 5 years.

Debt Consolidation Loans and the re-Payment Program

While it may sound counter-intuitive, the lowest interest rate may not be your best alternative. Why? Well, low interest rate loans often come with extended principal re-payment periods. For example, a higher interest rate loan - and we're talking in the 6%, 7%, 8% range here - might repay 3% or so of the principal with each monthly payment, a low interest rate loan may only repay 1% or so of the principal with each payment.

This means that you'll be paying for that low interest rate loan for a MUCH longer time, and this means that your total out-of-pocket costs at payoff for that low interest rate loan will be much higher than the higher interest rate loan.

What we're interested in here is total out-of-pocket costs at payoff, not necessarily interest rate. That being said, however, if you plan of paying more than the minimum payment each month, say by adding equivalent of 3%-5% of the principal, a lower interest rate loan can certainly work to your advantage...but you have to do it every month, not just every now and then.

So Where Can You Find the Funds to Underwrite Your Debt Consolidation Program?

Well, some of the best ways and places to find the funds to cover you debt consolidation program are listed here, but not in any particular order:

You can use a credit card to consolidate the balances due from your other cards. Although this may sound silly, if you have a good enough credit rating you might be able to score a card with a much lower interest rate than you'd get with other forms of consolidation loans.

You might want to consider using the equity you have in your home, via a home equity loan, to borrow funds.

But be aware that there are two basic types of home equity loans: there're the traditional home equity loans where you get a specific amount of money, often at a fixed interest rate, that you have to pay back on a fixed schedule, and then there's a home equity line of credit, where you borrow up to a pre-approved credit limit, whenever you need funds so long as you're below the credit limit. Lines of credit often have variable interest rates.

These loans come with some other advantages as well: you can usually get attractive interest rates with these loans, and the interest is usually tax-deductible if you itemize.

You can refinance your home for more than you actually owe, using the overage to pay off your balances due. This is called a cash-out refinance, and taps into the equity you've built up in your home. This can be an especially attractive option if you can refinance at a substantially lower interest rate than your current mortgage.

You might consider taking out a traditional debt consolidation loan with your favorite lender. But there are some caveats: these loans typically carry relatively high interest rates, and often have extended payback periods.

You might try a credit counseling agency. These agencies will work with both your and your creditors to develop a payment plan - usually at a lower interest rate. You'll make a single monthly payment to the counseling agency, which, in turn will pay all your creditors. But be careful which agency you work with. If the counseling agency pays your bills late, you'll pay the price since you're still responsible to the lender.

Stick with an agency organization that's accredited by the Association of Independent Consumer Credit Counseling Agencies and / or the National Foundation for Credit Counseling. You might want to look for a local (state) chapter Of Consumer Credit Counseling Services, if you're considering this option.

You might want to consider developing a rapid re-payment schedule for yourself. Determine the absolute maximum amount you can pay every month, digging as deep as you can into your pockets - eliminating any "discretionary" spending, and commit to paying that amount every month (this must be more than the sum of the minimum payment on all your credit cards).

Pay the minimum payment due on all your cards except your highest interest rate card, paying the remainder of your committed amount to that card. Continue this until your highest interest rate card is paid off. Repeat this process with the next highest interest rate card, then the next highest, and so on. You'll be surprised at how rapidly you can get your credit cards paid off in the manner.

Regardless of the method you choose to finance your debt consolidation program, before starting the process, you MUST stop using your credit cards, or whatever good intention you have will be undermined by new balances due, and you'll end up right back where you started from, in debt up to your eyeballs, and unable to pay your bills.