4 Important Factors to Consider Before Consolidating Your Debt

By Anya Bennett



With personal debt consolidation you can merge all your existing debts into a single monthly payment at a lower interest rate. You can use a home equity loan or a personal loan as a consolidation loan and can use it to pay off your credit card debts and other loans. Consolidating with a home equity loan can be beneficial as the interest qualifies as a tax deduction. However, the process of consolidating loans is not as easy as it sounds. You have to pay the price for curbing your monthly payments and for bringing the loan terms in your favor. Just like any other debt relief plan, personal debt consolidation has its pitfalls and should only be undertaken after a lot of contemplation. Here are 4 important factors to consider before choosing to consolidate your debt:

1) Hidden Fees and Extra CostsOften debt consolidation loans cost more than imagined and can make you fall into greater debt. The consolidation loans often carry origination fees and other hidden costs which you sometimes overlook while signing the agreement. Sometimes consolidation loans require an expensive loan insurance to protect against bankruptcy losses. In addition, by consolidating your debts you can incur a higher interest rate that can increase the overall price of the debt.

2) Pay More Over The Long RunConsolidation loans can lower your monthly payments considerably, but it can only be made possible by stretching the repayment duration. As a result by the time the loan gets actually repaid, the borrower ends up paying more than he/she currently owes.

3) Adverse Impact To Credit ScoreClosing accounts and opening consolidation loan accounts result in severe damage to one’s FICO score. The FICO score is determined on the basis of debt-to-income ratios to some extent and by closing current credit accounts and opening up a single line of credit for the consolidation loan. By doing this the consumer reduces the amount of credit available to them, which may eventually harm his/her credit score.

4) Causes Collateral DamageTo obtain a lower interest rate consolidation loan the consumer often borrows against personal collateral for security. However if the borrower defaults on payments of a consolidation loan, the lenders get the legal right to seize the collateral. As cars and homes are the only assets that some Americans possess, losing them can leave the borrower with nowhere to live and no way to get to work.

Personal debt consolidation can certainly help you minimize your outstanding debt burden but it is best for you to be prepared for the consequences.



Suze Orman's Debt Consolidation Tips:

4 Reasons To Open A PC Financial Account

We all have to have a bank account, but we rarely spend much time thinking about where we should do our banking. In some cases you may have opened your account because your parents banked there or they were having a promotional offer at the time (a free Frisbee!).

Most of the big banks in Canada (RBC, TD Canada Trust, Bank of Montreal) operate in the same way and offer comparable banking services with fees associated with them. This may be the best choice since most of these fees are now avoidable. These fees may be small but they add up to a lot and really you aren't getting much value for it. For instance if you are paying $20 in bank fee every month, that is $240 you're spending each year. Invest that money at 8% interest for 30 years and you end up with $27, 188! So that's why banks have those fancy offices in those big beautiful sky scrappers.

Today we have the option of choosing an electronic banks (President's Choice Financial, Ally, ING Direct) which have shed away all the bricks and mortar of conventional banks. These banks are able to offer great value because they don't have a huge building with lots of overhead, such as clerks and expensive office space. This does have the disadvantage of not being able to do complex banking transactions easily but for most of your day to day banking needs electronic banking is great. Here are 4 reasons to open an account today:

1) No Fees - as mentioned earlier you can avoid fees by having an electronic bank account. PC offers a great chequing account where you can pay your bills online, withdrawal money, make interac transactions all without any fees.

2) Free Cheques - on top of not paying transaction and other account fees you can also get cheques for free. Banks usually charge anywhere from $30 to $40 per booklet so there's a potential for big savings here.

3) Highest Interest for Saving Account - hands down the interest rates on savings account will always be higher than any conventional bank. This is because they avoid the high expenses banks have to deal with. PC is currently offering a promotion where their interest rate on savings is 2% until October. There base interest rate for is currently 1.5% which is better than any interest rate you can get at a conventional bank. I know that 1.5% is nothing to brag about, but the idea here is that electronic banks always offer the highest rates. So you don't have to do a bunch of research and move your money around.

4) Accessibility - finally a PC account is better than Ally or ING because your money is very accessible. Since PC has some agreement with CIBC you can access your money anywhere there is a CIBC atm machine without any fees.

PC is the electronic bank I'm most familiar with, however Ally and ING also offer similar banking options. The important thing is that we have a choice, stop lining your banker's pocket with your hard earned cash. Make the switch today!

How to Want What You Have

In our quest to banish our debt and reach financial freedom we often get caught up with keeping up with the "Jones". We often end up making poorly thought out purchases that bring us temporary joy, that lacks long term fulfillment. How to Want What You Have by Timothy Miller is a great book that teaches a fundamental philosophy to live by. In it Miller describes the basic human instinct that drives us to perpetually desiring More.

We are never quite satisfied with what we have because a basic survival instinct is to strive to become the "leader of the pack". Whether we do this by obtaining status symbols or accumulating wealth there is a deep desire to continually consume. The problem is that once we reach the bar we set, it ends up just rising again. Miller explains where this instinct originates and some ingenious methods in overcoming this instinct.

The three principles in which he presents in the book are Compassion, Attention, and Gratitude.

Compassion: is the ability to understand that all others around us are pretty much striving for the same things in different ways. Also we must understand that no one is more entitled to getting what they want more than you are. When we have compassion for the people around us we become less critical and judgmental which frees us from hate filled feelings towards others.

Attention: is focusing on the present. Sometimes we get so caught up in reaching our goals we forget to stop and smell the roses. Attention means not dwelling on the mistakes of the past and not wishing for a better tomorrow. Attention means belonging to the now and enjoying the present for all that it is.

Gratitude: is being grateful for what you have. We live in one of the most wealthy countries in the world. An individual in Canada may not think of themselves as wealthy compared to friends, neighbours or family, but in reality we are in the top 5% of the wealthiest in the world. A majority of the world's population is more worried about how they will feed there family tomorrow rather than how they will get there plasma screen and surround sound set up.

This book should be read before any other personal finance books because it helps set the foundation for a meaningful life. Having this insight will help us set meaningful goals that will bring us lasting joy and purpose. As the saying goes true happiness comes from not having what you want, but wanting what you have.

Don't take my word for it. Here is a video of the Dalai Lama's thoughts about inner peace, happiness and money:

Spending vs. Fulfillment

We all know how great it is to go out and purchase something we've always wanted. It makes us feel great to finally bring home something that we've been eying in the mall display for months. But how many times have you ended up bringing something home only to find that your purchase wasn't as great as you though or that once you owned this object you ended up not using it at all. In many cases you may have been ecstatic at first, but psychological studies have shown that our happiness quickly fades after most discretionary purchases. Eventually the widgets we purchased may not be used and end up in storage where it collects dusts until next year's garage sale.

Not all purchases are created equal and this article is about how we must separate our wants from our needs in order to live a more fulfilling life. Knowing the difference will also help us reach our financial goals faster. Here is an excerpt from the book “Your Money: The Missing Manual” by J.D. Roth.

Two writers are at a party thrown by a billionaire when one jokes “How does it feel to know that our host makes more in a day than your best known work has made in its entire history?” The other writer responds, “I’ve got something he can never have. I’ve got Enough.”

Tthe relationship between spending and happiness is non-linear, meaning that every dollar you spend brings you a little less happiness than the one before it.

More spending does lead to more fulfillment – to a point. But spending too much can actually have a negative impact on your quality of life. The authors suggest that personal fulfillment, that is being content with your life can be expressed graphically like this:

Survival: A little money brings a large gain in happiness. If you have nothing, buying things really does contribute to your well-being. You’re much happier when your basic needs-food, clothing, and shelter – are provided for than when they’re not.

Comforts: After the basics, you begin to spend on comforts: a nice chair or extra pair of pants. These purchases also bring increased fulfillment, but not as happy as the items that satisfied your survival needs. This part is still positive but not as steep.

Luxuries: Eventually your spending extends from comforts to outright luxuries. You move from a small apartment to a home in the suburbs, and have an entire wardrobe. You drink hot chocolate in the winter and sit on a new sofa with a library of DVD’s. These things are more than comforts they’re luxuries, and they make you happy pushing you to the peak.

Overconsumption: Beyond the peak, Stuff starts to take control of your life. Buying a sofa made you happy, so you buy recliners to match. Your DVD collection grows from 20 titles to 200, and you drink expensive hot chocolate made from Peruvian cocoa beans. Soon your house is so full of Stuff that you need to buy a bigger home and rent a storage unit. But none of this makes you happier. In fact, all of your Stuff becomes a burden. Rather than adding to your fulfillment new Stuff actually detracts from it.

The sweet spot on the Fulfillment Curve is in the Luxuries section, where money gives you the most happiness: You’ve provided for your survival needs, you have some creature comforts, and you even have a few luxuries. Life is grand. Your spending and your happiness are perfectly balance. You have enough.

Here is a video from MSNBC about how spending on experiences is more valuable than most widgets you could be wasting your hard earned money on:

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