Is a Debt Consolidation Loan Right for You?
Many people like getting debt consolidation loans. First, of course, the loans simplify the payment process. Instead of paying multiple lenders, you only have to make one loan payment. You can also expect a lower interest rate and get out of debt faster.
Even with these benefits, debt consolidation loans aren’t for everyone. Before you sign on the dotted line, make sure that a debt consolidation loan is a wise choice for your situation.
Check Your Eligibility
First, you need to see if you’re eligible for a debt consolidation loan. Start by looking at your credit score. If you’ve been struggling to make your payments, your score might have paid the price. If your credit score is too low, you’ll have a hard time getting a debt consolidation loan. Even if you can get a loan, you’ll have trouble getting a favorable rate.
You also need to consider the amount you need. Lenders are only willing to provide so much in unsecured debt. Many lenders won’t go above $50,000, and to get that much, you need to have a solid credit profile. If you owe more than that, a debt consolidation loan might not be the right choice.
Check Your Finances
You also need to check your finances to see if you can make the monthly payments. Debt consolidation loans help you get out of debt faster, but the monthly payments might be higher.
For example, let’s say you are drowning in $15,000 of credit card debt. The interest rate is 16.99 percent APR, and your minimum payment is about $450 a month. If you continued to make the minimum payment, it would take you over 21 years to pay the credit card off.
Now let’s say you get a debt consolidation loan to pay that credit card. The term is 36 months, and the APR is just 13 percent. You’ll be out of debt in three years instead of 21 years, but your payment will go up to $505 a month from $450 a month.
Many people are willing to trade the higher payment to get out of debt faster. Still, if you cannot afford to pay the extra money, you need to consider other options instead. Otherwise, you might default on the loan.
The Ideal Candidate
Are you still unsure if a debt consolidation loan is the right choice? Look at the ideal candidate to see if you’re a good fit.
The ideal candidate owes between $1,000-$50,000 in unsecured debt. The candidate can make the monthly payments on the loan without problems. Also, the best candidate has an excellent credit score and can get the best rate.
The best candidate also understands that he or she needs to change spending habits going into the future. Otherwise, the debt will pile up once again. For instance, if you get a debt consolidation loan to pay off $15,000 in debt only to charge $15,000 once again, you’ll be in the same bad situation.