If you are in debt probably you have a house loan, a car payment, several credit cards with some maxed out not to mention a student loan that you’re still paying, then you are probably spending most of your money on bills that are due each month. It can seriously affect your income and can also be very draining on you. If you want to improve your income as well as your financial future, you should consider debt consolidation.
Managing debts is a daunting task more so handling outstanding small loans is quite overwhelming if left to accumulate. You need to manage your obligations in the smart way possible to avoid repercussions that can be stuck with you for decades. Debt consolidation is one of the best ways to manage multiple outstanding debts. If you consolidate your debt correctly, it can save you a lot in interest costs.
What Is Debt Consolidation?
Debt Consolidation involves merging of loans in one so that you will no longer owe multiple lenders but a single one. The various lenders’ dues will be cleared off, and you will only remain with one loan to handle. Debt consolidation can help you manage your debts since it means that you could end up with new loan payment terms with lower interest rates and a different loan term.
A lot of people interchange the term debt consolidation and refinancing, but there is a slight difference between the two.
What Is the Difference Between Debt Consolidation and Refinancing?
Refinancing means renewing the terms of the loan with a loan that has lower interest rates and a shorter loan term whereas debt consolidation means combining several loans and offsetting them with a single large loan. It enables the borrower to change the length of the loan as well as the interest rates. In simple terms, refinancing means trading one loan for a new one with better terms whereas, debt consolidation means taking out one new loan to pay off multiple existing loans. The concept behind debt consolidation strategy is to bundle up all your high-interest debts into one, easy to pay, and less-expensive loan.
Reasons why you Might Need a Debt Consolidation loan
Some of the reasons you might need to consider debt consolidation include:
- You misunderstood the original loan terms
It is possible for anyone to misinterpret the loan terms and hurriedly sign under the dotted line. For example, you could have three different loans, and one could have a differing amortization schedule than the other two, and if you don’t understand what this means, you won’t fully understand the loan, and in some cases, the APR could be more than you expected. In the end, not following your loan terms can cost you a thousand dollars. Now that you have a better fundamental understanding of how loans work, you can consolidate your loans with high-interest debts into one single loan and have one with lower APR, which would result in payments that are easier to manage.
- You had no better option
If you knew that the interest on the loan was high, but you took out the credit anyway because you had to, then you might want to consider another option. Many people had taken out loans with poor terms because of the situation that they were in such as emergencies that required immediate cash or a client had not paid when they were supposed to or if something happened and they had a cash flow issue. In such situations, they took out the loan with poor terms to save the business and then they can worry about the consequences later. Consolidating the high-interest debt and all of the other loans into one stable monthly payment with a lower APR could be a perfect option.
- You over-leveraged with multiple sources of debt
Another scenario is one where there is no way out for example if you have 5 or more outstanding short-term loans. You may have been forced to take out several short-term loans, for example, the reason that many people take out short-term loans is that their credit score isn’t high enough to get a long-term loan.
If you are wondering whether you are eligible to take out a debt consolidation loan, then check out the following few conditions you need to consider.
How to Decide If You Qualify For Debt Consolidation?
- If you have multiple outstanding loans
Since debt consolidation is designed to help borrowers pay off more than one loan and bundle it up into one loan, then if you do have several short loans you are eligible.
- If the current interest rates are high and you would like to have lower ones
If you already have relatively low-interest rates, debt consolidation might not help. But, if you are currently paying high-interest rates, there is a good chance that you can get a better rate when you consolidate your loans. However, it’s important to understand, that the interest rate that you would qualify for would depend on several factors such as your total income, the number of years you have been in business (if it’s a business), and your credit score.
- If you currently have short-term loans and you would like to extend your payments
If you have multiple short-term loans and you need more time to pay them off, debt consolidation could be a good option. If you can qualify for debt consolidation of a multi-year term loan, it could help extend the payments and possibly increase your cash flow.
- If you have an excellent personal credit score
A credit score is a significant determinant factor with all loans. When it comes to eligibility for a debt consolidation loan, your credit score will determine if you qualify as well as your interest rate. If you are already paying a low-interest rate, it might be difficult to find a loan with a lower rate than you are already getting.
On average, an excellent credit score is 700 or above, but if you have been in business for over a year and your credit score is 620 or higher, there could be some options available to you when it comes to getting lower interest rates. If your credit score is between 550 and 620, you may still have a few options, but you might have trouble finding a rate that is lower than what you are paying now. If your credit score 500 or below, it can be challenging to refinance or consolidate your current debt.
- If combining debt makes good financial sense
You are the only person who understands your finances, and you are the one who knows how your current cash flow, expenses, revenue, and future potential look. Before you make any decisions, you should do your research concerning your existing loans and the options that you have, should you decide to consolidate your debt and then base your decision regarding debt consolidation option on how it will affect you now as well as in the future.
Debt consolidation is a smart option for those with multiple loans and high-interest revolving credit cards to get their debt under control but never go into this process blindly. It’s important to do your research to make sure that it is the best option for your particular situation.
Is Debt Consolidation Loan Right For Me?
So, before you decide whether a debt consolidation loan option is right for you, do the following:
- Plan your monthly budget.
The surefire way to get out of debt is to make a commitment and have a solid plan. You can compare your income and your expenditures to determine how this new loan will affect you and where you can cut back.
- Know your debt.
Before you make the decision, review your bills to determine how much you owe. Also, assess how much of a loan you need and be sure not to include loans with lower interest rates than the loan. Find the principal balance and the interest rate for each of your debt accounts.
- Shop around for lenders
You need to check with a variety of financial institutions and loan consolidation companies to determine which offers the lowest interest rates and fees, most easy monthly payments, and best overall service. Many companies will help you consolidate your debt that can range from banks to online lenders. A majority of them will give you an interest rate based on your credit score, though some lenders use different factors to screen you, for example, some lenders look at your, employment, education, and several other factors in an attempt to offer you the best rates possible, even if you don’t have a lot of credit history.
- Review the cost.
Another thing that you need to consider is the additional fees or costs associated with the loan that you intend to take. Make sure you are aware of all hidden charges and that you can afford the loan.
- Know your goal
You also need to consider the difference between how much you pay now versus how much you will pay with the new loan. If your payment on the debt consolidation loan isn’t favorable, then it may not be a good option for you. Determine the goal of your debt consolidation for example, if you want to reduce the total payment term or keep the same term and pay less every month.
- Check out your credit report.
If you check your credit report, you will not only understand your credit issues and whether a debt consolidation loan can help, but also it allows you to determine that the information in your credit report is accurate.
- Choose the best option for you
Once you have found the debt consolidation loan that can work for you and meet your goals, then it is time to decide. Be sure to check for fees, interest rate changes, and prepayment penalties. You can use our debt consolidation loan search engine on this page to help you find recommended lenders.
- Pay off all your debts and set the payment date for your new loan
A lump sum amount will be deposited into your bank account once you get your debt consolidation loan approved. It is up to you to pay off each of your previous debt accounts and then set a payment date for your new debt consolidation loan. An excellent way to help you manage it is to enroll in automatic debit to set it off and forget it.
Debt consolidation is a smart way to manage multiple debts and to get a single loan with better terms and interest rates. If done correctly, it can help you achieve your financial goals faster.