Everything You Need to Know Before You Take Out a Debt Consolidation Loan
November 29, 2018
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles.
As of August 2018, Americans carried over $1.041 trillion in revolving debt. Most of this debt is held on credit cards where the consumer isn’t paying off their balance every month. Considering the average credit card interest rate is currently over 17%, it’s no wonder so many consumers look for financial products that might provide some relief.
One such product is known as a debt consolidation loan or personal loan. This type of loan lets consumers consolidate their debts with a fixed interest rate, fixed monthly payment, and fixed repayment timeline.
By consolidating their debts and changing up their repayment structure, indebted borrowers are often able to break out of bad spending habits caused by credit cards while also getting out of debt faster. With a lower interest rate, consumers may also be able to save money along the way.
7 Debt Consolidation Truth Bombs You Need to Know
If you are someone who can’t seem to stop racking up more credit card debt, a debt consolidation loan may be exactly what you need. Before you start shopping around for another loan, here’s everything you need to know:
#1: It’s crucial to shop around for the best rates.
First things first. It’s important to shop around among several lenders before you apply for a personal loan for debt consolidation loan. Because each lender has their own criteria and processes, shopping around with a few lenders is the best way to find a loan with the lowest rate and best terms you can qualify for.
If you don’t shop around for a loan and simply go with the first lender you check out, you are leaving money on the table whether you want to admit it or not!
#2: If you’re approved, your credit score will impact your interest rate.
Before you apply for a debt consolidation loan, it makes sense to get a free look at your credit score. Why? Because, good or bad, your credit score plays a big part in the type of interest rates you’ll qualify for when you go to borrow money.
Most personal loan companies also have a minimum credit score requirement, usually between 580 and 620. If your score is lower than that, you may not qualify for a debt consolidation loan at all.
Fortunately, there are plenty of ways to improve your credit score if you find out it needs some work. But, the first step is finding out where you stand.
#3: Watch out for hidden fees.
Any time you apply for a loan, it’s important to read the terms and conditions and fine print to look out for fees. While many personal loans don’t have any fees, some charge an origination fee, application fee, a prepayment penalty, or other fees.
Ideally, you’ll want to apply for a loan that charges no fees or fees that are very minimal.
#4: You can pay your loan off early.
Speaking of fees, make sure your debt consolidation loan doesn’t have a fee for paying your loan off early. While your debt consolidation loan will come with a fixed loan term, you don’t necessarily have to stick with it if you’re able to become debt-free sooner.
The more you’re able to pay each month, the more you’ll pay toward the principal of your balance. Not only will this help you chip away at the total amount you owe sooner, but you’ll save money on interest, too.
#5: You can save big money with a debt consolidation loan.
Speaking of savings, don’t underestimate how much money you could save by consolidating your debt. Imagine you have $10,000 in credit card debt at the average APR of 17%. If you were making a minimum payment of $200 per month, it would take you 88 months to pay your balances off at a total cost of $17,600.
If you were able to consolidate those debts with an APR of even 8% and make the same monthly payment, however, you could reduce your payment timeline to 62 months and pay a total of $12,400. That’s a savings of almost $5,000 and 24 months!
#6: Also consider a balance transfer credit card.
While you’re considering the prospect of a debt consolidation loan, you should also look into balance transfer credit cards if you feel you can pay off your debts within a year to 20 months. That’s because balance transfer cards let you secure 0% APR for up to 20 months, letting you consolidate your debts and avoid interest the entire time.
Some balance transfer cards do charge a 3% or 5% balance transfer fee, however, so make sure to compare balance transfer offers to find the best deal. Also note that, if you have so much debt it will take several years to pay it off, you may be better off with a personal loan that offers a low fixed interest rate.
#7: To win the game, you must stop borrowing money.
Finally, don’t forget that consolidating debt won’t help your situation unless you are prepared to stop digging. Debt consolidation loans can help you get a lower monthly payment and a lower interest rate, but you are bound to be in the exact same situation years from now if you don’t change the habits that got you into debt in the first place.
After you take out a debt consolidation loan, it’s smart to put your credit cards away in a safe place that isn’t easily accessible. Stick to cash or debit cards while you’re paying down debt instead and try looking for ways to cut your spending. Also start using a monthly budget so you can get a handle on where all your money is going.
Debt consolidation loans can be a valuable tool, but they help the most when you’re willing to help yourself. Like it or not, the most important rule about getting out of debt is that you have to stop borrowing and start living within your means.