Dealing with debts is overwhelming and gets more complicated when dealing with multiple lenders. It becomes a challenge to keep up with payments since you’ll only be covering the interests most of the time. Additionally, your credit score becomes negatively affected, making it difficult to access other loans.
You can manage multiple loans by consolidating them into one by taking a debt consolidation loan. A single loan account is easy to operate and may reduce your average interest rate. Here is a comprehensive guide to consolidating your debt.
What Is a Debt Consolidation Loan?
A debt consolidation loan merges your existing debts into one. Your current balances are replaced with the new loan, making it possible to clear your debts faster. Ideally, after consolidation, you’ll have a single monthly payment with a lower interest rate.
Benefits of Consolidating Your Debt
Debt consolidation is a good idea when dealing with multiple debts across different lenders or credit cards. Some of the benefits that come with debt consolidation include:
Simplified Monthly Payments: Debt consolidation combines numerous repayments into a single payment. It can be challenging to handle multiple lenders every month or deal with different types of debt repayments. With debt consolidation, it becomes easy to pay your debts consistently without worrying about lowering your credit score.
Lower Interest Rate: The interest rate on a new debt consolidation loan is usually lower than the interest on your current rates. It’s recommended you first do a market check to compare the interest rates you are currently paying and what you’ll be expected to pay after consolidation.
Boosts Your Credit Score: Although consolidating your loans may first interfere with your credit score by temporarily lowering it, the aftermath will be positive. A debt consolidation loan only requires you to keep track of one monthly repayment instead of multiple payments. Credit score majorly factors in the payment history. For this reason, it will highly improve after you start with the repayment process.
What Are the Requirements for Consolidating Your Debt?
The qualifications for a debt consolidation loan depend on the lender, your credit score, and your income. Every lender has its terms and conditions, but they all refer to your credit score and the debt-to-income ratio that indicates your loan repayment ability. Scores from mid-600s to 739 are considered good, while scores lower than 579 are poor. You can still get a lender with a low credit score; however, the interest rate will be higher.
Steps To Consolidating Your Debt
After deciding to consolidate your debts, you’ll need a comprehensive debt consolidation guide. Some of the steps you can use include:
- Check Your Credit Score
A credit score is one of the most important factors that lenders use to decide if they’ll grant you a debt consolidation loan or not. Knowing your credit score will make it easy to identify a lender willing to assist quickly. Most lenders put their credit score requirements on their websites and offer tools you can use to check your score.
Monitoring your credit ratings might help you determine which loans stand a higher chance of getting and which ones you don’t. Additionally, it may assist you in identifying any inaccuracies that can affect your credit ratings.
- Compare the Shops Around
After having an idea of your credit rating, the next step would be to compare the terms given by different lenders. Obtaining estimates from various lenders is the first step to assisting you in determining which alternatives you can use.
Don’t be quick to take the first loan offers you come across. Take time to analyze and compare the lenders’ rates, terms, and the maximum loan amount they offer.
Online lending sites may be the best place to start. This is because it’s possible to see the rates with a soft credit score check known as prequalification. The process is effective because it does not interfere with your score.
Checking what your current bank has to offer is also important. They may decide to ignore your poor score if you have a good relationship with them.
- Consider a Secured Loan or a Co-Signer
A secured loan is a good option when it becomes difficult for you to get an affordable unsecured debt consolidation loan. It is easier to get because it only needs some form of collateral that usually has the same value or more as the loan. The collateral can be any form of an asset such as your home that can be used to cover the loan in case you default.
A co-signer may also be a good idea to consider when you have a bad credit score. This can be someone close to you with a good credit rating, such as a friend or family willing to help. Depending on the lender’s minimum requirement, they may help you qualify for a lower interest rate. The co-signer is responsible for the loan, the same way that you are. Their credit rating will be negatively affected if you default or miss any installment.
- Improve Your Credit Score
If consolidating your debts is not that urgent or you’ve not been able to identify a suitable option for you, then you can first work on improving your credit score or your debt-to-income ratio. You can also work on ways of boosting your income to cover your small loans instead.
Make sure you pay your monthly installments on time for several consecutive months. Work on reducing your credit card debts and cutting unnecessary expenditures.
Where Can You Get a Debt Consolidation Loan?
It’s essential to be prepared when considering a debt consolidation loan. Sources such as banks, credit unions, and other lending companies are a great place to start.
Credit unions operate as non-profit financial institutions. To qualify for a consolidation loan, you must first become their member, pay membership fees, and reside around the area.
It’s not usually possible to prequalify for a loan with credit unions because they conduct a thorough credit check, which can temporarily harm your credit score. If you wish to work with a credit union, it is best to consider one around your area.
It’s fast to get a loan with online lenders since the application is typically made online without physically visiting a branch. The application process is easy, with minimum to zero paperwork involved. It’s also possible to prequalify with online lenders without affecting your credit rating.
Online rates are usually higher than credit unions, especially if your credit score is low. They also charge an additional origination fee, used as your loan processing fees. For this reason, it is recommended that you apply for a slightly higher amount than what you need. Their repayment plan involves equal, fixed monthly installments.
Remember to look out for all the available options before settling for one. Once you’ve found an opportunity that matches your needs, honor the payment agreement.
Paying the agreed monthly installment on time will assist you in gradually improving your credit score. Keep in mind that a debt consolidation loan will not solve the root cause of your debt. While applying this guide to consolidating your debt, also try to take charge of your financial stability and avoid adding new obligations to accounts that you have settled.