Now’s the time to understand your finances and take control. This leaves many looking at debt consolidation as an effective option to group up all debts into one convenient payment. Typically becoming a smaller total payment than when you combine other types of debts.
This happens because your other debts, medical loans, credit cards, and personal loans can come at lower rates, especially if you have excellent credit. Then if you pay it off faster, they typically don’t have penalty fees either.
One thing before you start
Personal loans are everywhere, but the best place to check is with your local bank or credit union as a comparison. There are some 3rd party options online as well, offering the convenience of doing everything remotely while still offering competitive rates to traditional methods.
Tips to get you started
You want to prequalify. This is where personal loan providers reach out to you, and you technically prequalify. You basically submit your financial information, from loan size to whether you rent or own, to your income. This will then consider all that and give you a list of prospective loan options, with the total amount, monthly payments, and the APR. These days it’s a soft check on your credit score most of the time, meaning your score wont be affected, and you can check out multiple lenders.
Check out your lender. When looking for your lender, and you seem to have found the right one, make sure there’s a customer service line to reach out to. You may not think you need it because you’re just excited to get approved, but you want to have the ability to reach out to someone in case of questions later on or if you face hardship repaying the debt consolidation loan. Another thing to look out for is hidden fees. Things like origination fees can vary or not exist between lenders. Also, look at late payment fees and if there are any prepayment penalties that you want to avoid.
Have a plan. Don’t just get a personal loan because you can. You typically want to use them for debt consolidation, so confirm that ahead of time. Personal loans can also be used for weddings, funerals, home improvements, or even vacations. This may be asked during the application because personal loans typically cannot be used for education or business. Always check, and see if they may pay your debtors directly.
Understanding your debt consolidation loans
You’re starting out with a personal loan to pay off all your other outstanding debts. The best advised way to do this is to work with a lender that will directly pay off those debts with the loan’s proceeds. If you receive the funds upfront, stay disciplined and remember the purpose of this loan.
Getting your debt consolidation loan
The process could be slightly different per lender, but you can follow these general guidelines.
- Start with knowing your credit score. This determines what type of rates you’re going to get and how much you’re able to borrow. You can get these on numerous sites for free or sometimes for a fee. You want to have as high a score as possible, typically 720+.
- Work on your credit score. If you find yourself with a weak credit score or below the minimum, typically 610 or 620, then you need to work on raising it by paying your debts on time and slowly reducing them.
- Calculate the amount needed. Don’t take out more than you need for your debt consolidation. This is a journey you’re taking to get yourself out of debt down the line. The loan comes with interest, which means that it will also need to be paid.
- Always check out your options. See what lenders are offering. Work to prequalify and check what rates they would offer you. Always confirm it’s a soft check.
- Get your debt consolidation loan. Once you’ve done the previous steps and found the best loan with the right terms and repayment timeframe, officially apply for it and get yourself one step closer to being debt free. The application timeframe can vary and could take a few days.
What if I have bad credit? Am I still able to get a debt consolidation loan?
You’re looking at debt consolidation to improve your credit, but it’s gone down so far, so what are your options? You need to work on rebuilding it! The first step is working on how much debt you owe versus your income. You can both be paying off your debt and increasing your income, tackling it twice as fast. You can also look at your smaller debts and focus on eliminating them sooner, which reduces how much you need to borrow.
If you have some liquidity, you could consider a secured loan, which can help improve your credit with proper payments and support your debt consolidation efforts.
You may also have better luck applying for secured loans, which are more accessible to applicants with bad credit as they reduce the lender’s risk and often come with lower interest rates.
Here are some other great tips to consider for those with poor credit.
Is my credit affected poorly by debt consolidation?
In the short term, it will be a hard inquiry on your credit which only hurts it a bit. At this stage, though, you’re looking to obtain that loan, so no worries. Your actions’ overall impact will only increase your credit score in the long run as long as you stick with the plan to eliminate the debt. First, you’ll pay off outstanding debts on time, then as you make each payment and lower your debt for your debt consolidation loan, your score will improve periodically.
Focus on the long term, and you’ll see a few years down the line how excellent your credit score has become due to the consolidation.
An expanded list of alternative debt consolidation options.
Personal loans are a great option but not always your only option. However, they are the simplest way to consolidate all those debts and centralize your payments down to one.
Other options include:
- 401(k) loans. Many of these retirement accounts allow you to borrow against it at an excellent interest rate since you’re using the funds in your retirement as collateral. You can typically borrow up to 50% of your 401(k) plan up to $50,000. One thing to note is that it will slow down your compounding on your retirement plan because, effectively, the money is taken out for the debt consolidation. The repayments minus the interest will go back only on that monthly basis as well. Most companies will automatically take out the payment from your paycheck, affecting your cash flow until the loan is paid.
- Home Equity. Another collateral-based loan option you can consider to help with debt consolidation and debt relief. You can take it out as a fixed loan amount based on a home equity line of credit that enables you to access the funds as needed. The amount you can borrow is subject to the value of the home subtracting any liens on it such as your mortgage. Keep in mind that typically as you approach a higher amount to borrow versus the LTV or loan to value, the rates will also shoot up. However, you’re putting your house up as collateral, which can be taken if payments aren’t made.
- Credit cards with balance transfer options. For those with some of the best scores, you may find yourself offers with zero interest promotions on credit cards. That means you can transfer your debts to a credit card with this offer and have anywhere from 12 to 18 months of no interest on your debts. It’s an excellent way to save money, but keep in mind to pay it off in that period; otherwise, you’ll start paying interest. You must stay focused here and not fall into the trap of getting new cards with this offer to pay off older debt. Eventually, you’ll end up with too many credit cards, and the promo rate will expire.
Why debt consolidation is an excellent strategy
You may still wonder if this is the route to go, but it all depends on your personal situation. Do you have a strong enough credit score with outstanding high-interest debts? Are your financial habits disciplined enough for the payments?
Make sure also that you have enough monthly cash flow to pay off the new debt and the commitment to pay that loan monthly until it’s done. You might find some debt consolidation loan options have long repayment terms, such as five to seven years, so keep that in mind that’s how long you’ll have that monthly payment.
The best suggestion is to have an overall plan for your finances, and this debt consolidation is just one piece of the whole journey. But yes, if you want to stop making multiple monthly payments, then consolidating your debts is an excellent strategy.
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Disclaimer : All loans are subject to credit and underwriting approval. Guideduconsommateur.ca is an information blog and loan search platform, not a lender. Guideduconsommateur.ca only works with advertiser networks and partners that comply with laws and regulations of United States, United Kingdom, Australia, New Zealand and Canada. Loans range from $1,000 to $50,000 with terms ranging from 12 months to 60 months or more. Annual percentage rates (APRs) range from 3.5% to 19.8% and depend on the assessment of your credit profile. For example, for a $5,000 loan paid monthly over 60 months, a person would pay $94.36 per month for a total of $5,661.60 over the course of the entire loan period.