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<April 2015>



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4 Tips to Consolidating Your Debt

By Stewart McClure, Regional President

approved-debt-consolidation-loan-application-formAre you feeling weighed down by debt? If so, you’re not alone. The 2012 National Financial Capability Study (NFCS) reports that 19% of individuals say their household spent more than their income (not including the purchase of a new home, car or other big investment), while 36% who spent about the same as their income are breaking even. Only those who spend less than their household income are able to save.

If you’re worried about carrying too many big balances and are having a difficult time building your savings, debt consolidation may be a good tool for you. By consolidating your debt, you can turn multiple high interest payments into one manageable low interest payment.

These four tips will help you decide the best debt consolidation direction for you.

1. Take your debt inventory.
Make a list of everything you owe and use financial calculators to help quantify the numbers. Include all obligations ─ mortgages, home equity, student loans, car loans, credit cards, etc. Note the interest rates and monthly payments.

2. Know your credit score.
You are entitled to receive your FICO® score for free from each of the three national credit reporting companies - Equifax, Experian and TransUnion – every 12 months. Your score is a picture of your credit history and is determined by the amount you owe, debt payment, length of credit history, new credit and types of credit used. Lenders use FICO scores in their loan determination process. Remember your score is fluid and can change, but there are steps to take to get your FICO back in good standing.

3. Research debt consolidation options.
With your picture of debt obligations complete, review solutions to reduce multiple payments. Options to consider for debt consolidation include a personal loan, home equity loan (HELOAN), home equity line of credit (HELOC), life insurance loan, or renegotiation with creditors.

Personal Loan – Personal loans can be a smart way to consolidate high-interest balances under one monthly fixed-rate, fixed-term payment. This can enable you to pay less over the term of your loan and reduce interest costs.

HELOAN and HELOCUsing the equity in your home can be an affordable way to pay off higher-rate credit cards and other loans, or consolidate your outstanding bills to gain monthly savings. A HELOAN is a traditional home equity loan, sometimes called a second mortgage. It has a fixed interest rate and payments. A HELOC functions like a credit card with a borrowing limit, based on your home’s equity and your ability to pay, from which you may draw as needed. The interest rate and payments are variable with the interest rate tied to an index that is beyond the control of the bank, such as the Prime Rate as published in the Wall Street Journal. Both of these loan types may provide tax* advantages.

Negotiate with Creditors – Many understand hardship situations and will work with you to resolve an outstanding debt by reducing interest rates or your monthly payment. Creditors are under no obligation to help you consolidate debt, but more often than not they will be willing to work with you.

Life Insurance Loan – Borrowing from your life insurance policy is a way to consolidate debt, but keep in mind that this will reduce the amount paid out to beneficiaries. You should also consider the tax ramifications before you decide to use this tool. Withdrawals on gains beyond what you’ve paid in premiums are taxable.

4. Make a plan to stay on track and boost your savings.
Once you consolidate your debt, focus on developing a budget to track spending and boost savings.
• Track all of your daily spending and cut back on expenses that are not necessary.
• Pay yourself too! Make a regular payment to your account to build your savings.
Pick a budget template to get started!
• Seek the help of a financial advisor to review options for your personal situation.

Consolidating debt can help cut your expenses and preserve your credit score. This process will take some commitment, but the result will streamline your monthly payments and make some room for you to build your savings.

To learn more about your options for consolidating debt, please visit our website to find a Lakeland Bank office near you.

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