If you have more debt than you can handle, you may be thinking of getting a debt consolidation loan to ease your financial burden. What is the best way to go about it? How do you even go about getting a debt consolidation loan? This article provides an in-depth look into debt consolidation and the different options available.
Carrying a balance on credit cards is on the rise. It is estimated that 133 million consumers have at least one credit card balance that they do not pay in full every month (source). The American Bankers Association reports that 42 percent of all credit card users carry a revolving balance every month.
Credit card balances and other unsecured debt like medical bills, unsecured personal loans, and payday loans can mount up. You may find yourself paying multiple creditors every month and struggling to pay high-interest fees in the process.
What is debt consolidation?
Debt consolidation is a process by which you combine the balances of unsecured debts into one loan. If you can consolidate all your bills with a debt consolidation loan, you will only need to pay one bill rather than paying multiple creditors.
In addition to the convenience of just one bill to pay, debt consolidation loans typically offer a lower interest rate than you may be paying now. Depending on the amount of your loan, you can potentially save thousands of dollars over the life of the loan because of the lower interest rates offered.
The purpose of getting a debt consolidation loan is to simplify your payments every month and to potentially save money on interest fees. A debt consolidation loan does not eliminate any portion of the principal debt you owe, but it can make your financial life a little easier to manage.
To truly make debt consolidation work, you must be committed to repaying your debt consolidation loan and changing the way that you use unsecured credit. A potential danger of debt consolidation is that you may be tempted to obtain new credit cards or continue spending on current credit cards during the term of the debt consolidation loan. By doing this, you may end up in a deeper financial hole than the one you are in now.
What are the requirements to qualify for a debt consolidation loan?
Different lenders have different requirements for debt consolidation loans. In general, there are a few factors that almost all lenders will consider when determining whether you qualify for a debt consolidation loan. They are:
Lenders want to know whether you are able to repay a loan. To determine this, they may ask for a few recent pay stubs and maybe your tax returns from the previous year.
Many lenders will require that you have a certain debt to income ratio to qualify, though the acceptable percentage varies from lender to lender. Another common requirement is that your monthly disposable income needs to be between 10 percent and 15 percent of your gross income.
Lenders are also interested in your payment history. Lending money is a little like betting on a horse. Just as you would not be inclined to bet big money on a horse without knowing how that horse has run in the past, your lender will not be inclined to lend you money unless he or she can look at the way you have paid your bills in the past.
Even a few missed payments in your history can potentially prompt the lender to raise the interest rate. A negative credit history may be a deal-breaker for your lender, meaning that you may not be eligible for a debt consolidation loan.
Your lender wants to know that you will not simply take the money and run. For this reason, your lender may ask about your employment history, how long you have owned your home, and so forth.
Since many lenders require you to secure your loan with collateral such as your home, lenders need to know how much equity you have built up in your home. The more equity you have, the more likely you will be to qualify for a debt consolidation loan at a reasonable interest rate.
This does not mean that you cannot get a debt consolidation loan without collateral. However, unsecured debt consolidation loans have higher interest rates. Such unsecured loans may also be for much smaller amounts. This makes it more likely that your debt consolidation plans may fail.
What are the risks of secured debt consolidation loans?
Putting up your home or other collateral to obtain a debt consolidation loan can help you get a lower interest rate. However, it is important to remember that if you fail to make payments on your debt consolidation loan, you could lose your house or other collateral.
Unless you are confident you can handle repayment without an issue, agreeing to put your home up as collateral is not a good idea. In this case, it is best to find other debt relief options.
How can you get a debt consolidation loan without putting up collateral?
There are a few ways that you may be able to get a debt consolidation loan without putting up collateral. For instance, suppose you owe less than $3,000. You might consider applying for a new credit card with an introductory 0% APR for 12 months or so. Doing so can be a good strategy if you have the self-discipline to avoid new purchases on the card.
If you owe more than $3,000, or you prefer not to add another card to your wallet, you can apply for a personal loan from a credit union or an online lender. Check out our unbiased reviews of personal loans here.
Before applying for a personal loan for debt consolidation, consider the pros and cons of doing so. Unsecured personal loans may carry a higher interest rate than secured loans. Make sure the debt consolidation loan is worth your time. Crunch the numbers to see if a personal loan will help you get out of debt faster than simply trying to pay your bills as you are doing now.
If your credit is good to excellent, you may have several lenders from which to choose. As in all financial matters, it is good to consider your options carefully before committing to a course of action.
How can you get a debt consolidation loan with poor credit?
There are many lenders that advertise loans for people with poor credit. However, buyers beware. Many of these online advertisements are scams.
Does that mean that you cannot get a loan with poor credit? No, it doesn’t. It does mean, however, that you may have to pay a substantially higher interest rate than those with better credit have to pay.
If you have a relationship with a local bank or credit union, that may be a good place to start your loan search. Additionally, you may be able to obtain a loan by adding a co-signer with good credit, or by exploring peer-to-peer lending.
What can you do when you don’t qualify for a debt consolidation loan?
No matter how badly you might need one, sometimes you simply cannot qualify for a debt consolidation loan. If that happens, do not worry. There are still other debt relief options available to you. Alternatives to debt consolidation include consumer credit counseling, debt settlement, and bankruptcy. The most advantageous option will depend on your individual circumstances and the type of debt that you have.
When does debt settlement make sense?
When debt consolidation is not a viable option, debt settlement may be the right solution for your financial dilemma. Unlike debt consolidation, in which the goal is to pay off the full amount you owe to creditors, debt settlement focuses on reducing the principal balance owed. Debt experts do this by persuading your creditors to accept a lesser amount than you owe.
Debt settlement companies negotiate with your lenders on your behalf. Because they have experience and relationships with major creditors, specifically credit card companies, their success rate is higher. Sometimes, their negotiations may result in a significant reduction of as much as 30 to 50 percent of the amount you owe to your creditors.
Debt settlement is recommended for those who are unable to find other reasonable means to handle their debt load. It is also a smart option for those who wish to avoid filing for bankruptcy. While debt settlement does affect your credit score negatively, it is also a way to relieve your financial burden in a relatively short amount of time. For many consumers, being debt-free within two to five years outweighs any temporary negative effect on their credit scores.
If you are in a bad spot financially, it is wise to examine all your available options, including debt settlement. To discuss the options available for your particular financial situation, get a free debt settlement consultation today. free debt settlement consultation