No one plans on getting into debt. Sometimes it’s an illness that starts us down this unfortunate path. Sometimes its a failed business venture or some unexpected happening.
Debt is something that can cause a lot of stress. More marriages fail because of financial matters than fail because of infidelity!
So getting your debt under control is extremely important. For people who are confronted with serious debt problems, acquiring a debt consolidation loan is seen as the best solution.
With a debt consolidation loan, all existing debts can be paid off, all at once, giving you a chance to be free from the pressures and embarrassment of dealing with lenders and debt collectors.
Is Debt Consolidation Right For You?
But how do you know if it’s the right for you to consolidate? What are the important factors that you must take into consideration before deciding to apply for a debt consolidation loan?
Key things to keep in mind:
- Do you qualify for a debt consolidation loan?
- Is it a true loan or is the company you are using negotiation a settlement on your behalf?
- What are the terms
Do you qualify for a debt consolidation loan
Ideally, you qualify for an unsecured debt consolidation loan. Meaning you meet these 2 main requirements:
- You have good credit – your score might be low because of all the credit you are using BUT you do not have late payments, charged-off accounts or collection accounts on your credit report. (Although a few late payments will not kill your chances of approval. It’s important to get the debt consolidation loan BEFORE you start to fall behind on your payments)
- You are employed – they want to make sure you have the income to pay the loan. Being financially stable is VERY important when applying for this type of loan.
But for some people, they won’t qualify for an unsecured debt consolidation loan. And the bank will want some form of collateral. Most of the time they want you to be a homeowner so they can use your home as collateral.
This type of loan has the lowest interest rate. But it puts your home at risk so it shouldn’t be taken out without you reading the fine print!
If you default on the loan you can end up getting your collateral foreclosed on or repossessed.
Will my credit score go down if I take out a debt consolidation loan?
No. In fact, it should actually go up! IF the loan appears as a personal loan on your credit report. Once you use the loan to pay off your credit cards your credit utilization will go down. Which will naturally improve your credit score.
You should see the change in your score within 60 -90 days depending on WHEN your credit card companies update the credit bureaus of your payment.
Paying Off Debts with A New Debt
Although the procedure of acquiring a debt consolidation loan is easy, there are certain consequences that must be considered.
Clearly, paying off debt with another debt that is secured by your home, or car or some sort of collateral, involves risks. This is why borrowers are warned against turning to consolidation without first considering other possible solutions.
For instance, instead of getting a loan, would it be possible to negotiate with your creditors to acquire easier repayment terms?
Balance Transfer Credit Cards:
If you have good credit, have you thought about getting a balance transfer credit card? Bank of America has several GREAT balance transfer credit cards that give you FREE balance transfers (for a promotional time period) and 0% interest for 15 months!
When you look at balance transfer credit cards, remember to look at the fees they charge to transfer your high-interest debt to this new card. When I was looking around it was a fee of 2 – 5% of the amount you transfer. If you are moving a lot of debt to this card, it can add up quickly and make doing the balance transfer a bad financial move!
Choosing the right debt consolidation loan for you!
The best debt consolidation loan will help you reduce your overall debt, without putting your home or other collateral in jeopardy. It is also a plan that you can repay easily from your current income.
If you feel that you may have a problem in making the monthly payment they want, then it’s not the right debt consolidation loan for you. Always remember the debt consolidation loan should help you pay off your debt quickly, economically, and most importantly, reduce the stress being in debt causes.
Choosing a debt consolidation lender
When you choose a debt consolidation lender you need to do your research. There are a lot of companies out there and not all of them have the same programs. Use the internet to find reviews, look at their record on BBB.org and really do your homework before you sign up.
Don’t just choose a program because it’s offering you the lowest monthly payment. They may be giving you an extended loan term to create that low monthly payment. Which can lead to you repaying thousands of dollars more over the life of the loan.
Also, understand if you are getting a TRUE debt consolidation loan. This is a loan that pays off all your debts with a NEW loan. Some debt consolidation companies actually do debt settlement agreements with your creditors.
Debt Settlement vs Debt Consolidation
When you enter into a debt settlement agreement, the consolidation company consolidates your payments into 1 monthly payment and they take on the responsibility of making sure the payments are made to your creditors.
This isn’t a bad thing, but when you use this sort of debt consolidation company. You won’t see your credit score increase right away. Your debts have NOT been paid off. And some creditors will negotiate with them, but also close the account. So you can’t use the card anymore.
If you want to use a debt consolidation loan to be free from debt, you should make a decision based on accurate research and evaluation. Do not allow pressure or anxiety to push you to make impulsive decisions that you may regret later on.