Financial Literacy - Smart borrowing
Chris Farrell
debt
Ask why you need a loan

q_v2.gif Some lenders have frozen their customers' home equity lines of credit. Is there anything that consumers can do to "thaw it"?

a_v2.gifNo. The truth is that they are basically going to have to wait.

q_v2.gif In light of tightening credit and greater expectations on the part of lenders, what questions should you be asking yourself before applying for a loan?

a_v2.gifYou should be well acquainted in advance with current interest rates and all of the costs associated with the loan, and you should be able to answer the question, "Why am I doing this?"

People often take out a home equity line of credit or a home equity loan in order to pay for emergencies -- for example, they lose their jobs and they just want to borrow some money against the equity in their homes to help tide them over. That's OK with a home equity line of credit, but you have to be very careful. Home equity rates are not that attractive right now, and these types of loans should be taken out mainly to help pay for projects designed to improve the value of your home over time. If that's not what's going on here, forget it.

“Most people simply get into more financial trouble with debt consolidation.”

q_v2.gif Is a debt-consolidation loan the better option for people seeking to pay off their credit card debt in one fell swoop?

a_v2.gifDebt-consolidation loans are rarely a good idea. Typically, with a debt-consolidation loan, there's a 3 percent fee, and that's just an added expense for people who are already financially strapped.

What I advise is that people forget about the debt-consolidation loan option and, instead, focus their energies on the basics of managing money and their household budget so that they'll then know how much money they can put toward debt reduction using a disciplined payment schedule. If you can establish the discipline of paying down debt, you'll find that the debt-consolidation loan really doesn't do anything for you that you can't otherwise do better on your own.

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Frankly, most people simply get into more financial trouble with debt consolidation.

For example, let's say that I have three credit cards and I have $16,000 in total credit card debt. OK, I take out a debt-consolidation loan for that entire amount and I'm now paying it off. Now I have three credit cards with no debt on them. If I'm not disciplined, I can easily end up with the debt of my debt-consolidation loan plus accumulate new debt on my credit cards -- and be worse off than I was before. Unfortunately, this happens way too often.

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