Almost everyone takes a loan at some point in life. This may be for education, a car, or other bills. Unfortunately, the debts pile up, leading to high-interest rates and hard-to-manage monthly payments on your credit cards. And since such situations are inevitable, how you handle your loan can make a difference.
Debt consolidation is the first step to managing your debts and involves merging all your loans into one new single payment. This way, you’ll apply for debt consolidation loans to pay off your debt balances and work on paying the new loan. The process is seamless and offers many ideal benefits.
Benefits of Debt consolidation
- Streamlines finances
Merging your multiple loans into one will reduce the number of payments and interest rates. It will improve your awareness, and you won’t make late or miss a payment. Also, you’ll have a clearer picture of when to complete the payment.
- Expedites payoff
Debt consolidation loans accrue less interest than individual loans, allowing you to make extra payments with your savings.
The additional fees will aid you in paying off the debt faster, enabling you to save more on the interest rate.
Remember, debt consolidation loans offer more extended terms. This way, you can pay off your debt early to take advantage of the terms and benefits.
- Lower interest rates
After your credit score has improved, consolidating your debts will decrease the overall interest rate. You’ll get lower interest rates, meaning you will save money over the life of the loan. Therefore, scout for different debt consolidation lenders to get the best rates.
- Reduced monthly payment
Consolidating your debt will lower your overall monthly payments, and this is because future payments will spread over new and extended loan terms. Though long-term loans are more beneficial in the long run, they will free up room for your monthly budget.
- Improves your credit score
Having multiple loans can ruin your credit score and reputation. Fortunately, debt consolidation can increase your credit score in many ways. It helps you pay off your credit, reducing the credit utilization rate in your credit report. Also, making consistent, on-time payments will improve the credit score.
How to do debt consolidation
Here are key steps to know;
1. Check your credit score
The first step in debt consolidation is to calculate how much you owe. This helps you know the amount to borrow when you consolidate your debt.
Your chances of getting such a loan depends on your credit score. You’ll have better chances of qualifying for the loan with a higher credit score. So, check your credit report to ensure everything is in order.
2. Make a debt consolidation plan
Set your goals right before you apply for debt consolidation. Generally, you’re looking to simplify your debt payments by combining the loans. Other reasons include the following;
- To save money: You’ll need to look for a loan with a lower interest rate to ensure more payments goes towards paying down the balance rather than the interest.
- To get out of debt sooner: Look for a shorter-term loan with monthly payments that you can afford.
- To get smaller monthly payments: Choose a long-term loan to spread the payments over a more extended period.
Make the plan by asking yourself these vital questions: Can I afford monthly payments on an 8-year loan if I consolidate my loans? What about a ten-year or five-year loan? How much money will I be saving?
3. Find &compare debt consolidation loans
Use your debt consolidation plan and target lenders with loans that fit your needs. Start by checking your rate and loan terms with various debt consolidation loan lenders. Comparing different lenders will raise your chances of finding the best loan deals.
4. Apply for the loan
Once you settle on a lender, apply for your loan. You may be required to share documents like the most recent pay stub, past tax returns, bank statements, or personal ID. The lender will take time to review your application and qualify you.
You’ll need to weigh your consolidation option as every method is ideal for specific situations.
Debt consolidation options to consider
Balance transfer credit card
An ideal balance transfer card often comes with zero or low-interest rates for an introductory period. If you get the card, you’ll move the balances from a high-interest-rate credit card to the new one. It aims to pay the entire balance before the promotional APR period ends.
Pros
- Quicker and easier to get
- Saves money if you pay the debt during the intro period
- No collateral is required
Cons
- APR after the introductory period can be high than other loans
Home equity loan
Home equity is the difference between your home’s appraised value and how much you owe on your mortgage. You can borrow some of that equity for an affordable rate if you have enough equity and good credit history.
Pros
- Larger loan amounts
- Fixed-rate and fixed monthly interest for home equity loans
- Long payment terms
Cons
- Home is the collateral
- More extended repayment period increases the overall cost
Debt consolidation plan
A debt consolidation loan allows you a low-interest rate, enough funds to cover your debts, and get better repayment terms. The loans are unsecured; your rate and borrowing limit depends on your credit profile.
Pros
- No collateral required
- Fast approval and funding
- High loan amounts
- Lower interest rates
Cons
- Low rates require excellent credit
Debt management plan
Debt management plan is an excellent idea if you’re looking for a debt consolidation option that doesn’t require taking out a loan or applying for a transfer credit card. You’ll work with a credit counseling agency or debt relief company to negotiate with creditors and draft a payoff plan. You’ll close all monthly and make one monthly payment to the agency to pay the creditors.
Pros
- Can improve credit scores
- Better loan rates
Cons
- Strict requirements
Conclusion
Debt consolidation is a great way to save money and improve your financial standing. You’ll have less stress and peace of mind to work on rebuilding yourself and paying off the debts. Therefore, seek help from a leading debt consolidation firm near you and learn how to do it right.