Fix spending problem before refinancing debt with consolidation loan

And when you apply, avoid paying heavy upfront fees to lender

Dollars & Sense

December 23, 2001|By Liz Pulliam Weston | By Liz Pulliam Weston,SPECIAL TO THE SUN

Recently I decided to apply for a $20,000 consolidation loan to lower my interest rate on some debts - mostly for tuition and computers for my kids. My financial history includes a bankruptcy in 1996, so I don't qualify for most loans or credit cards. I answered an ad in our local newspaper and was approved. But to receive the money, I have to wire the lender $990. They say it's to pay for some kind of insurance policy just in case I default. I want to believe that this loan program is for real but common sense tells me that it is a huge scam. Is it? If so, do you have a list of the best credit-card consolidators who might give me a loan?

Of course you want to believe this loan is for real. That way, you could keep borrowing and not address the issues that have you $20,000 in debt just five years after your previous debts landed you in Bankruptcy Court.

You have a spending problem, and another loan isn't going to fix it. You need to learn to live within your means. You may argue that financing an education is commendable, but did you need that tuition loan because you spent freely on other things?

Look in your phone book for your local Consumer Credit Counseling Service and make an appointment to discuss your finances. This not-for-profit organization's counselors can teach you about money management and budgeting. If you're really having problems paying your bills, they can set up a debt-repayment plan and negotiate with your creditors for lower interest rates. (Note: Be sure you're dealing with the true not-for-profit CCCS; some disreputable companies use sound-alike names.)

Even if the lender you've found is legitimate - and you're right to wonder - you don't want to pay hefty upfront fees to get a loan. If your credit is so bad that you have to pay a big fee or a high interest rate to get the money, you need to concentrate on improving your credit rating. That means paying off your debts as quickly as possible and not adding new ones.

Once your credit improves, you should be able to qualify for better loan terms. But get your financial house in order first.

My husband and I recently purchased a home. We have received several offers for a bimonthly mortgage payment program. The benefit seems obvious: The total interest paid on the loan over time is reduced because you are paying down the loan with a check every two weeks instead of every month. Is this program recommended? What are the drawbacks, and how would it affect our taxes?

Paying down your mortgage faster can save you money on interest. But you can save yourself some more money by ignoring the costly "programs" you're being offered and simply doing it yourself.

What most of these plans do is have you send half your monthly mortgage payment to your lender every two weeks. Because there are 52 weeks in a year (or 26 bi-weekly periods), you make the equivalent of 13 monthly mortgage payments each year. This plan will shave six or seven years off your loan and potentially save you tens of thousands of dollars in interest.

The problem is that most of these programs charge several hundred dollars in "set-up" fees. All you really need to do to start paying off your loan faster is to add some extra money to your regular mortgage payment and make it clear to the lender that the excess should be used to pay down your principal. Some lenders make this easy by providing a space on your mortgage coupon for extra principal payments. If yours doesn't, contact it to find out how to go about making extra payments.

Most payments in the first several years still will be deductible interest, so that's good news if you need that tax deduction.

Before you launch on this plan, however, you should understand that most mortgages offer a pretty cheap way to borrow money. You might do much better in the long run by investing extra money in stocks or bonds instead of making larger loan payments.

Liz Pulliam Weston is a columnist for The Los Angeles Times, a Tribune Publishing newspaper.

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