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If you are carrying debt that has a high interest rate, taking out a debt consolidation loan may be the answer for you. These types of loans give you the benefit of paying off your debt with one payment each month which makes it easier to manage your finances. These loans will also help you pay down your debt faster since the payments are applied to both the principal and interest.
When it comes to getting one of these loans, you have a choice between a bank or a direct lender. A direct lender could be better for you in this case since they not only use different criteria when determining how credit worthy you are but they may offer better rates and terms. With that being said, choosing the right lender means more than just going with the one that offers you the lowest interest rate.
When selecting a lender for a debt consolidation loan, look for one that you recognize by name or has a good reputation. Beware of what are called "loan aggregators or brokers". These companies act as middle men who can share your private information with any other business, including dishonest ones. Also keep in mind that when you are entering sensitive information online, always look for the “https://” in the url as the “s” stands for “secure.” You may also see a padlock symbol which is another way of letting you know it is a secure site.
With personal loans, you are usually charged an origination fee that can range from 1%–5% of the total amount borrowed. The amount you pay will depend on the current condition of the market, your own financial situation as well as your debt payment history. Keep in mind that this fee is taken from the amount you plan to take out the debt consolidation loan for. So if you are taking out a loan for $5000 and your origination fee is $500, you will ultimately be receiving $4500. If you need that full $5k, you are going to want to add that fee to the total amount you need. On the other hand, if your loan does not appear to have this fee, double check prior to signing any papers. Tip: Always ask about any other fees, if you don't ask, they may not tell.
When applying for a debt consolidation loan, you may be offered insurance to cover you should you miss a payment. They may offer unemployment insurance which will make your loan payments for you if you lose your job or are out of work for eligible reasons. They may also offer you life insurance that will cover the payment of your loan in case something happens to you. We do not recommend this type of life insurance since it only covers the loan. It makes more sense to have a general life insurance policy that can be used to cover any type of expense. The main takeaway here is that loan insurance is expensive and often comes with loopholes that do more protecting of the insurance company and not you.
Interest rates on debt consolidation loans can vary widely between companies. Your credit score will pay a big role in determining the rate you get but the average is usually between 14%–18%. With that being said, if you have great credit, you can see a rate as low as 4% annually and if you have poor credit, you can see as high as 25%.
You may come across some online lenders that seem to have great rates and terms on debt consolidation loans but you also want to be sure they have a “live” and knowledgeable representative available for you to speak to. Many of these companies are not staffed the way a bank or credit union is. If it is a reputable lending business, there should be knowledgeable advisers you can speak with to help you with any questions and information.
Any lenders you come across that tell you your credit history is not important should be avoided. Any reputable lending company will be doing a credit check in order to determine past payment history. They want to make sure you are capable of paying your debts. This check on your credit score can have a short term effect on your credit score since they are most likely going to check with all three bureaus ( Equifax, TransUnion and Experian).
Once you apply for a loan, you will most likely begin to receive an influx of offers from various lenders. You may get one that offers a lower payment but a longer term. If you were to go with this offer, you will be paying more in then end. If you can afford to pay more every month, then you should go with the shorter term loan.
Prior to moving forward with a lender, confirm they are registered in your state to do business. Also stay clear of any lenders that ask you to pay up front or for a debit card to pay any fees. These are clear signs that you are not dealing with a reputable lender. Any fees should be deducted from the loan and are not something you pay up front.
These types of lenders tend to have long standing relationship with lenders. If you are trying to get a debt management plan approved, this may play to your advantage. If you have not consulted with a credit counselor, it might not be a bad idea. They will typically negotiate on your behalf for a lower interest rate.
At the end of the day, a debt consolidation loan does not help you with your personal finance issues. You need to come up with your own plan for dealing with your overspending and poor budgeting issues. If not, you can end up with even more debt if you wind up defaulting on the loan. If your current credit situation is not positive, you may want to consider hiring a credit repair company. They can help correct any issues and get your credit back in good standing.
If you are ready to take control of your debt, a debt consolidation loan may be the answer for you. Having all your debt in one place with a good interest rate can help you get back on track financially. Whatever you end up choosing, make sure you deal with the root of the problem. You don't want to end up in the same situation again.