2 Things To Do Before Applying For A Debt Consolidation Loan
When you are staring at a stack of bills, it is easy to feel overwhelmed and all alone, even though many people are in the exact same boat. In fact, the average American owes $15,607 to credit card companies, and $32,656 in student loans. To help manage your debt, many lenders offer consolidation services, which might lower your interest rate and lump your bills into one manageable payment. However, debt consolidation isn't right for everybody. Here are two ways to tell if this valuable service could help your situation.
1: Check to See How Much You Stand to Save
As you compare your debts to one another, it is easy to start feeling angry. You might notice that the payday loan place down the street charged you a whopping 35% interest rate, while you are only paying a 5% rate for your car. It can also be frustrating to keep track of different due dates and past due balances. Fortunately, debt consolidation can make all of that a breeze.
When you take out a debt consolidation loan, you are effectively borrowing one large sum of money that you can use to pay back all of your different accounts. Instead of paying several different creditors, all you need to do is pay back the consolidation lender in one monthly payment.
Consolidation loans can be incredibly helpful for some people, but they aren't right for everyone. To demonstrate why consolidation loans would be right for some people and wrong for others, take this hypothetical situation as an example.
Two people owe $6,000 to the same companies, but have different principal amounts and interest rates. Here is a rundown of their financial situations:
Customer A Owes $6,000 Customer B Owes $6,000
Credit Card 1: $500 at 25% Credit Card 1: $1,500 at 12%
Credit Card 2: $500 at 15% Credit Card 2: $1500 at 8%
Auto Loan: $800 at 9% Auto Loan: $1000 at 5%
Student Loan: $4,000 at 2% Student Loan: $1500 at 7%
Personal Loan: $200 at 20% Personal Loan: $500 at 15%
Total Yearly Interest Total: $392 Total Yearly Interest Total: $530
Now think about what would happen if each customer decided to get a personal consolidation loan for $6,000 with a decent 7% interest rate. Each customer would end up paying $420 per year in interest, which would be a killer deal for Customer B, but would actually cost Customer A $28 more. Many people might wonder why this is the case, since Customer A's interest rates are generally much higher than Customer B's rates.
The reason that Customer A would be a bad candidate for debt consolidation is that the majority of their debt is a student loan with a low interest rate. Although a consolidation loan would lower the majority of their other rates, it would increase their student loan interest by 5%.
To determine if consolidation is right for you, click here and carefully analyze your debts. Be mindful of any large amounts that you owe, which could throw off the total amount that consolidation could save you.
2: Consider your Credit Score
In order to mitigate the risk associated with lending people money, banks adjust the interest rates that they offer depending on your credit score. A low score might indicate that you are less likely to pay money back on time or in full, which can end up costing the bank money in collection fees, lost income, and labor.
To offset these expenses, banks tend to charge people who have low credit scores higher interest rates. On the other hand, a high credit score shows the bank that you have a history of being reliable, so they are more likely to offer you a lower interest rate.
Before you apply for a debt consolidation loan, print off a free copy of your credit report in order to become familiar with your credit score. If you have a higher score than you did when you accumulated the debt, a consolidation loan might lower your average interest rate.
If debt consolidation seems like it could help you, talk to your lender today. You might be able to get a handle on your bills, without spending more money than you have to.