You’re sick and tired of being sick and tired of your mounting high-interest credit card debt, but you’re unsure what to do about it. You’ve heard of a financial strategy called consolidation, but you don’t know How Does A Debt Consolidation Loan Work? Here’s a primer.
What Is Debt Consolidation?
It’s basically taking a loan to combine your current debts into a single debt with one monthly payment. You can use it to lower the aggregate interest on your existing balances, which the loan also enables you to eliminate faster. In addition, a debt consolidation loan also streamlines debt servicing, since you have but one monthly payment to make.
As with most loans, the higher your credit score, the more loan options for debt relief you’ll have. You’ll also pay a lower interest rate.Depending upon the strength of your credit score, debt consolidation loans usually offer lower interest rates than most credit cards. For instance, the average interest rate for plastic for the first quarter of 2020 was 15.09 percent, while the average interest rate for personal loans was 9.63 percent.
Getting a consolidation loan – a form of personal loan – means you know what the amount you’re to pay will b each month and how long the payment period will last. Such loans remove the guesswork involved in paying monthly bills.
Does Debt Consolidation Hurt My Credit?
Consolidation loan applications require a look at your credit score, which causes it to drop a bit. Your credit will also get hit if you use the loan to satisfy credit card debt then start using your cards while you’re paying off the loan.
Still, if a loan would put you on a better path by enabling manageable payments that you would make on time each month, then getting one could make sense in the end. After all, on-time payments account for 35 percent of your FICO score.
How Do I Qualify?
It’s mainly about your credit score and payment history. Borrowers with scores of at least 690, relatively little debt, and high incomes have a broad range of lenders from which to choose. On the other hand, consumers with scores of 300 to 689 are deemed riskier by lenders and can usually only qualify for loans for bad-credit borrowers.
The most expedient way to discover whether you’re eligible for a consolidation loan is to go through the pre-qualification process, which only requires a soft credit pull. After going to lenders’ websites and punching in some personal info, you will gain a sense of the loans and rates available to you.
How Do I Get A Debt Consolidation Loan?
First, create a list of the monthly debts you wish to consolidate. If you apply for a loan, you must make certain you request enough to cover these debts.
Also, the loan’s interest rate and monthly payment amount should be lower than what you’re now paying. Otherwise, consolidation doesn’t make much sense. You also must be certain that you can make the new loan payment on time each month.
After determining your credit score and the desired loan amount and interest rate, you can apply to online lenders, large banks, and credit unions.
Other Loan Options
A loan is one way to consolidate, but there’s also refinancing with a zero percent interest balance transfer card, borrow against your home’s equity, or use your 401(k) savings. Each strategy carries its own risks and rewards.
So, how does a debt consolidation loan work? You have the answers. Now, run your numbers, do your homework, and decide whether this financial strategy is the best one for you.