If you’ve found yourself overwhelmed with debt and aren’t sure where to turn, you may want to consider debt consolidation. Although not right for everyone, debt consolidation could help lower interest rates and reorganize debt so you can finally pay off the money you owe. Read on to find out if this option makes sense for your financial situation.
Why Debt Consolidation?
Debt consolidation refers to when someone takes out a new loan to pay off smaller debts. People who use debt consolidation do so for several reasons:
• To reduce monthly payments: Debt consolidation helps to simplify finances. Rather than paying monthly to different creditors, borrowers owe one payment each month to a single lender.
• To save money by reducing interest rates: In some cases, debt consolidation can help to reduce interest rates, especially if you have good enough credit or collateral.
• To help stay organized: Reducing monthly payments to one makes it easier to remember to make payments on time.
• To pay debt faster: By lowering interest rates and reducing monthly payments, borrowers may find it easier to finally pay off debt.
When Is Debt Consolidation a Good Idea for You?
For some, debt consolidation offers an effective resolution for paying off money owed, that is, for those who plan to make payments on time, have good enough credit, and don’t take on any more debt. Some may turn to debt consolidation and find themselves even deeper in debt after making more bad financial choices. Therefore, debt consolidation makes sense for someone who intends to make payments on time and plans to stay debt free.
If the following applies to you then debt consolidation could improve your financial situation and get you on the way to becoming debt free:
• You have a good enough credit score: Many lenders will determine a loan’s interest rate for debt consolidation based on your credit score. If you have strong enough credit, you could qualify for lower rates through debt consolidation and save money on payments.
• You have collateral: If you own a home, property, or a newer vehicle, you can use this as collateral on your loan toward debt consolidation. This will make you less of a risk for lenders and qualify you for better rates on the loan.
• You are serious about paying off debt: Many make the mistake of consolidating their debt, but continue with the same financial habits. Over several years, they find themselves further in debt owing money to multiple creditors again. This defeats the purpose of consolidating debt in the first place. Debt consolidation is really meant for those who are serious about paying off the money they owe and staying out of debt.
• You have multiple high-interest credit cards and loans: Paying high-interest rates can cost a lot of money. Consolidating debt and obtaining a lower interest rate will save money and make it easier to pay off debt faster.
• You find a good rate on a loan for debt consolidation: At the end of the day, consolidating debt is really about saving money and setting yourself up for success in paying off debt. You could benefit from debt consolidation by finding a loan with better terms and a lower interest rate than your existing debts.
If you meet one or all of these criteria then you might benefit from debt consolidation. If you have any questions, reach out to a financial advisor or debt counselor to help decide the next steps towards becoming debt free.
How To Get the Best Rates on Debt Consolidation
If you qualify, you can get lower interest rates on your loan to consolidate debt. Lenders determine interest rates based on two factors: credit score and collateral.
• Credit score: Credit score represents the statistical likelihood that a borrower will repay a debt. If you have a good credit score, you may be able to qualify for an unsecured loan (no collateral required). Typically, the higher the credit score, the lower the interest rates on the loan.
• Collateral: Collateral refers to an asset that the borrower can pledge as a guarantee or loan security in case they cannot repay the loan. If the borrower defaults on the loan, the lender can take that asset and sell it for cash. This can include real estate or a newer vehicle. Usually, the higher the worth of the collateral, the lower the interest rates.
Where Can I Find the Best Debt Consolidation Rates?
Online debt consolidation services make it easy to shop around and compare offers from different lenders. Traditionally, banks and credit unions tend to offer lower interest rates. Other financial institutions may deal with higher risk loans and, therefore, charge higher interest rates.
Make sure that whichever loan you choose, you end up with a lower interest rate and better repayment terms than your existing loans.