Buying Guide for Debt Consolidation
What Is Debt Consolidation & How Does It Work?
If you’ve found yourself in debt and owning multiple lenders then debt consolidation may be an option that could assist you in paying down what you owe faster. The process works by taking out a new loan that covers the entirety of your outstanding debts, and then uses that new loan to pay off old creditors. Once completed, you are left with only a single monthly payment to your new lender, which ideally will have a lower APR than what you were previously paying.
In general, debt consolidation is suitable for all types of loans including credit card debt, student loan repayment, medical debt, auto loans, and more. Unlike relief, the process of consolidating does not eliminate or reduce the amount owed, it only offers a fast and easy way to pay off the outstanding debts. By consolidating, borrowers save money through the new, reduced interest rate and can enjoy an easier-to-manage payment schedule that virtually eliminates the risk of missed payments.
Why Do People Choose Debt Consolidation?
The main reason why someone may choose debt consolidation is that they are finding their current loans difficult to manage and expensive. Trying to juggle multiple lenders and varying payment schedules can be overwhelming, and if you aren’t able to stay on top of who to pay and when, it can quickly lead to missed payments and added fees. Not only that, but some of the outstanding debts could have high APRs that mean your monthly payments are going mostly towards the interest and not the principal balance. A debt consolidation loan aims to eliminate both of these issues, leaving you with only a single monthly payment and hopefully a lower APR.
Benefits of Debt Consolidation:
- May help to lower interest rates
- Can lead to debts being paid off quicker
- Will streamline finances and make debts more manageable
- May involve lower monthly payments
- Can help improve credit scores
Disadvantages of Debt Consolidation:
- Doesn’t eliminate or reduce outstanding debts
- Will not solve poor financial habits
- May include new fees and costs
- Doesn’t guarantee a lower interest rate
- Missing payments can impact credit score or incur fees
Understanding APRs, Rates, & Terms
To ensure your new debt consolidation loan is beneficial and right for you, it’s important to understand APRs, rates, and terms. These key components will breakdown what you are paying each month, how much you will owe in interest on top of your loan, and how long it will take you to pay off your new loan in full. When exploring debt consolidation loans, the most common acronym you will come across is APR, otherwise known as Annual Percentage Rate, and this number will tell you how much you can expect to pay every year on top of your principal balance.
APRs typically range anywhere from 3% up to 36% and will include both your interest rate as well as any applicable fees or costs. The lower the APR, the less you will be paying and this will generally be seen as lower monthly payments over the course of your loan. Lenders will determine your APR by taking into consideration your credit score, credit history, monthly income, any assets you may have, as well as other potential factors that are important to them. If you are considering taking out a debt consolidation loan, you will want to find the lowest APR available to you and may want to work on increasing your credit score before you apply in order to give yourself the best chance possible.
How to Find a Debt Consolidation Loan
Finding a lender who is willing to offer you a debt consolidation loan can be a bit of a tedious process, especially if you are hoping to compare offers and explore what’s available to you. Most lenders do require that you complete a pre-qualification application which will ask you general questions about your outstanding debts and current financial situation, allowing them to determine if their services are a good fit for you. If approved, you will then be asked to complete a more formal application which will deep-dive into your credit history before you are offered your final APR and term. It is recommended that you speak with multiple lenders before making a final decision, that way you can see what’s out there and feel confident you are selecting the best APR for your financial background.
While not for everyone, debt consolidation can be an extremely useful tool that can combine outstanding debts and create a single, more affordable monthly payment for you to stay on top of. Debt consolidation will not eliminate what you owe, nor will it automatically fix your financial problems, but it can make managing your debts more doable and can assist with paying off your debts faster should you choose that. If you’re interested in debt consolidation, start by exploring what lenders are out there and speak with a trustworthy loan officer to learn more about what is available to you and what you may qualify for.
