Factors to Consider When Thinking About a Debt Consolidation Loan

A debt consolidation loan is the act of combining (or consolidating) multiple debt obligations under one loan. Ideally the loan provides a lower interest rate for the consumer and provides interest savings. This is main reason you as a consumer would want to get a consolidation loan, to save money on interest and lower your effective APR. Otherwise, many consumers also appreciate the fact that they no longer have to make multiple payments and have one monthly payment under a consolidation loan.

What’s the Most Important Consideration?

The most important consideration to look into regarding a debt consolidation loan is whether it fits into your budget. Assuming the consolidation loan provides a lower APR and saves you money on interest (otherwise why else would you get a consolidation loan?), consumers should be aware of the high monthly payment. When consolidation credit card accounts into a debt consolidation loan, it’s extremely likely that your monthly payment will increase substantially, as opposed to your credit card minimum payments. It’s also important to consider what APR you are getting with your current credit score. If you are not saving money on interest, the consolidation loan is probably not best suited to your financial needs. Finally, it’s very important to consider whether the consolidation loan will consolidate all the debts you want it to. If you are only able to consolidate half of your debt, this may not be the best financial move for you.

Tips

A. Make sure you have the best credit score possible before applying for a consolidation loan. These loans are not very easy to qualify for, since you are combining smaller debts into one larger loan. Due to the size of the loan, lenders will look to be more risk averse and typically seek “good credit applicants”.One way you can boost you score before applying is by making sure that your utilization rate is as low as possible before you apply for the loan. An easy solution is to zero balance out any smaller credit card accounts you have and make sure they are reporting a 0% utilization on your credit report at the time of application.

B. Don’t be afraid to negotiate! Often times you can negotiate down origination fees and any other finance charges including in the loan.

C. Try to get a loan that has no pre-payment penalties. This way if you do get a windfall of cash, you can pay the loan off early and forego the rest of the interest charges due.

D. Lastly, weigh your options with different lenders and see who offers the best terms! Make sure you are not pulling your credit multiple times when doing this though.

Good Alternatives to Debt Consolidation Loans include:

• 0% interest balance transfers (these are promotional and usually only last 6-18 months).
• Using available equity in your home and making use of a HELOC or taking out a second mortgage.
• Reaching out to your current lender to negotiate the rate on your outstanding credit cards/loans.
• Debt settlement options in which you pay back less than you owe.