You’d like to get a consolidation loan to finally rid yourself of debt, but you’re worried you might make a mistake. The good news is there are lenders out there that specialize in working with people in your situation and are willing to show you how to consolidate debt right.
What is a Debt Consolidation Loan?
A debt consolidation loan is one that you use to eliminate current debts such as credit card balances. After your existing obligations are shifted to the new loan, you make repayments on that. The main thing here is to find terms – including interest rates — that are more favorable than what you have now.
The following are ways such a loan could benefit you:
- Simplifies bill paying. When you have multiple bills of varying amounts and due dates, it all can become unmanageable. With a debt consolidation loan, however, you would make a single monthly payment of the same amount each time.
- Possibly snag a lower interest rate. Debt consolidation loans should carry a lower interest rate than what you’re paying in the aggregate on existing debt. In fact, it’s the only way taking out such a loan makes sense. For the third quarter of 2020, for example, the average interest rate was roughly 14.6%, according to the Federal Reserve. Meanwhile, the interest rate for a two-year personal loan was only 9.34%..
- Improve your credit score. If you can pay down your debt faster with a consolidation loan, you may be able to help your credit utilization rate. In turn, this may help boost your credit score. And since you’d have just one payment to keep track of each month, a consolidation loan could improve your payment history, which will likely improve your score.
What Credit Score Do I Need for a Loan?
Each lender has its own credit standards, but scores of 579 and below are generally viewed as poor and can make it difficult for you to get a consolidation loan at all, let alone one with good terms.
You’ll have a better chance of qualifying with scores between 580 and 739. Be mindful, though, that your score is but one factor a lender considers when deciding whether to give you a debt consolidation loan. Other factors may include your income and recent payment history.
Searching for a Debt Consolidation Loan
Are you in the hunt for a debt consolidation loan? Well, it helps to have a plan.
- Check your credit scores. Yep, get a copy of your credit reports and scour them closely for errors that, if fixed, could help your scores. But overall, knowing your scores gives you a better idea of what you might qualify for, and which ones may be out of reach.
- Shop around. Once you know where you stand credit-wise, begin comparing terms offered by banks, credit unions, and online lenders. With the latter, you can “pre-qualify,” which doesn’t affect your credit and will give you an idea of eligibility. If your credit isn’t stellar, you’ll need to search wherever you can for the best loan terms. Credit unions may be more flexible. However, if you have a good relationship with your bank, you may as well try there.
- Consider a co-signer with good credit. This is a person – a friend or relative, say –who will share responsibility for a personal loan. Having a co-signer could mean approval for a loan that you otherwise couldn’t get. It could also mean a lower interest rate. You simply must handle repayment properly, however, or risk the relationship.
Thinking debt consolidation might be right for you, but you want to make sure you do it right? These tips and guidelines will help you make sure you’re a good candidate for debt consolidation.