Depending on your end goal, debt consolidation can be a great strategy to lower monthly payments on debts and save money on interest. The lower-interest payment can not only help save you money but may also allow you to pay off your debt faster. One way to consolidate debt is to get a debt consolidation loan.
Here’s information about how debt consolidation loans work, how to know if it’s right for you, and a step-by-step guide for how to get a debt consolidation loan.
What is debt consolidation?
Debt consolidation is when you combine multiple unsecured debts into one monthly payment. These debts could include credit card debt, auto loans, student loans, medical bills, or other types of debt.
The ultimate goal of consolidating debt is to pay it off so you can be more financially secure, and doing so with a debt consolidation loan can help reduce interest rates, repay your loans faster, and improve your credit score.
When is a debt consolidation loan right for you?
There are multiple ways to consolidate your debt, such as balance transfer credit cards, personal loans, home equity loans, debt management plans, and more. While each method has its pros and cons, determining how to consolidate your debt can depend on a few factors:
● Income. You’ll need proof of stable income to qualify for a loan.
● Credit score. The higher your credit score, the more likely you’ll qualify for a low-interest loan.
● Commitment. Consolidating your debt doesn’t mean it goes away, so you’ll have to be dedicated to making regular payments to pay it off.
How to get a debt consolidation loan
1. Check your credit score. A poor credit score could disqualify you from some loans, or it could mean higher interest rates. A higher credit score—typically above 690—may improve your chances of getting approved for a lower interest rate.
2. Analyze your debts and payments. List all the debts you want to consolidate and add up the total amount you owe to ensure the loan you apply for will cover the full sum.
Additionally, calculate your current monthly payments for these debts. While the new loan should have lower interest rates and better monthly payments, you’ll want to ensure it fits into your budget. A debt consolidation calculator might be helpful for this step.
3. Compare options. You can get a loan from online lenders, credit unions, or banks, each offering different terms, conditions, and rates.
● Online lenders typically are more flexible with approvals for the loan, but they could be more expensive depending on your credit score. You may be able to pre-qualify to compare rates and terms on a personalized level.
● Banks are great for those with good credit, and if you already bank with them, you could get a discount on your rate.
● Credit unions may offer lower rates to those with bad credit; however, many require a hard credit hit with your application which can temporarily hurt your credit score. Additionally, you’ll have to become a member.
4. Apply. Gather required documents like proof of identity, address, and income. Be sure to understand any extra fees, prepayment, or other penalties, and how the payments could affect your credit score. Once you’re ready, fill out and submit the application.
5. Make payments. Once you’re approved, you should start making payments immediately.
If the lender offers direct payments, your loan will automatically be shared with your creditors, paying off your debts. Otherwise, you’ll have to repay each debt with the money from the loan that’s deposited in your bank account. You should do this right away to avoid any additional interest or fees.