The Best Situations To Consolidate Your Debt (And How)

Should I consolidate my debt?

Debt consolidation is a way of gathering your current loans into one single loan. It keeps them organized and could also save you money. Debt consolidation is a way to take control of personal loans that have high-interest rates and threaten your financial well-being.

If you have too many loans and debts to keep up with, debt consolidation may be your best option to lower your monthly fee and interest rates. By lowering the interest, you can begin to improve your credit score by making your single consolidated loan on time.

When is the best time to get this type of loan? And how do you do it? Here are the best conditions to get your debts consolidated and how to do so. 

When Is The Best Time To Consolidate Your Debt?

People consolidate their debts under particular circumstances. The following are the situations when you should consider it.

When You Have Several Unpaid Debts

Common sense suggests you need more than one loan to consolidate debt. One advantage of debt consolidation is it helps you deal with your existing loans by transferring the charges to another lender. The lender will then assist by deciding which of the loans will be paid off first and assign you a single monthly payment instead of several different ones.

Before deciding to apply, do the math to see if the amount you are saving in interest is worth paying the fees to consolidate your debts into one. Consider different factors such as the number of debts, how long it takes to pay off the loans, and whether the debts you have can be paid off by a certain time without consolidating.

When Your Loans Have A Higher Interest Rate

Another possible advantage of consolidating your loans is a significantly lower interest rate than the rates of your individual loans. If you have expensive high interest loans, you may only be able to afford the monthly interest payment. If you’re unable to put any extra money towards the principle, you may never pay the debt off.

Consolidation may offer you a substantially lower interest rate which will allow you to start making progress on paying down your total debt.

Another advantage of consolidating your loans is the option for a single fixed-rate loan. This will negate issues that can arise from variable interest rates that can increase at any time. However, if you’re still unable to pay extra towards the principle after consolidating, it may make sense to pay off your individual loans one by one.

When Your Credit Score Improves

Credit scores are one of the main factors in determining your interest rate. They also play a crucial role in being approved for a loan. The case also applies to debt consolidation loans. You need to meet the minimum score that the lender requires to secure a loan that will benefit you. The typical minimum credit score required by lenders is often in the 650 range, but some accept borrowers with bad credit and will accept credit scores as low as 580.

It’s imperative you have a good credit score when you want to consolidate your debts or if you want to apply for a loan in general. There are several advantages to this, including better loan offers and lower interest rates. If you have a low credit score, you could look for ways to improve it. Some lenders are still willing to work with low credit scores, but the better score, the lower interest rate you will qualify for.

How To Apply For A Debt Consolidation Loan

The following are the steps and tips on how to apply for a debt consolidation loan.

Prepare Ahead Of Time

Before you seek out a potential lender, you need to prepare. Make a list of your debts that you want or can be consolidated, plus the amount you borrowed and each interest rate. Be specific about each loan you have because the lender will need to evaluate each debt to determine if it is eligible to consolidate.

Being prepared ahead of time with the account information for each loan will help you avoid unexpected fees and consequences down the road. Be transparent with yourself and be knowledgeable about the total debt you have and the interest rates associated with each.

Look For A Lender

Different types of lenders offer debt consolidation. You can get one at your bank, a credit union, online, and physical debt consolidation businesses. Don’t be afraid to shop around and ask for several different opinions. Debt consolidation is a business, and each business may offer you different rates and options to help you get out of debt. Avoid unnecessarily high fees from money-hungry lenders.

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Be careful of deals that sound too good to be true. If it’s a company you haven’t heard of, make sure to research to see if they operate legally or not. You can do so by looking up and verifying contact details and physical addresses or contact your state agencies to verify the lender is licensed to operate in your area.

Apply

The next thing you need to do once you have your suitable lender is to submit your application. Basic required information such as your government-issued identification, social security number, outstanding loans, and credit information will be necessary.

Once you’ve applied, the lender will evaluate your credit history and score as well as the risk you pose to them being able to pay the money back. Based on your history and creditworthiness, they will provide you information about which debts can be consolidated, the fees associated with the transaction, and the interest rate you qualify for.

Your monthly payment should also be clearly defined to show how much interest you will pay them over the life of the loan. Avoid signing anything related to your new loan based on verbal promises. Everything you are told should be written down before you agree to anything. If it isn’t written down, it doesn’t exist.

Putting It All Together

Debt consolidation is not always the right choice. If you can start paying down one debt at a time and create a clear path forward to get out of debt, the extra fees associated with debt consolidation may not be worth it. However, if you’re living paycheck to paycheck and a consolidation would lower your monthly payment and reduce your interest rates, it may make sense to help you make progress on your principle.

Keep in mind, if you haven’t changed your spending habits and started a monthly budget, a debt consolidation loan will only delay the inevitable. With changing your mindset, you will end up with a debt consolidation loan and start adding more debt on top of it.

This is not a get out of debt quick scheme. Use a consolidation loan to your advantage if and when you change your financial habits. A good credit score is one of the rewards for staying on time with your monthly payments and on top of your bills. If you’re struggling with debt, the day to change your future is today. Make the first steps towards taking control of your money, once and for all.