Do you owe money to creditors? Do you find it difficult to make the payments you owe?
If you answered yes to those questions, take comfort in the fact that you’re in the same position as many other Americans. According to a recent report by the Pew Charitable Trusts, as many as 8 in 10 people in the U.S. are in some type of debt, and over two-thirds report that non-mortgage debt is a necessity.
Being in debt can be stressful. If debt becomes a heavy burden, and you’re only making minimum monthly payments on your credit cards, you aren’t serving your best financial interests. The good news is that you have options, including debt consolidation, which can help you regain your financial freedom.
What is debt consolidation?
Debt consolidation is the process of bringing all of your outstanding debts together under one loan. If you’re having difficulty paying off your debts or if you have outstanding debt at high interest rates, this should be one of the first options that you explore.
In many cases, a debt consolidation loan will have a lower interest rate or terms that will allow you to pay off your debt faster. Having fewer payments to make each month also simplifies your personal finances.
Debt consolidation options
Depending on your particular circumstances, you may have several options for debt consolidation. These include:
Many people consolidate debt with a credit card balance transfer, using a card with a low or 0% introductory interest rate. This approach can be very effective in some cases. But because your interest rate will jump after the “introductory period” (which may be as short as 12 months), you’ll need to be able to pay off the balance quickly. Also, there are often transfer fees of 2-5%. If you are a homeowner, a home equity loan is another option. Home equity loans usually have low interest rates, but require using your home as collateral. This means that you risk foreclosure should you fail to repay the loan. You also might have to pay fees or closing costs.
Last but not least, there are various types of personal loans you can use for debt consolidation if you qualify.
Benefits of using a personal loan for debt consolidation
The primary benefit of using a personal loan for debt consolidation is that all of your debt is together in one neat and affordable package. Ideally, a debt consolidation loan will feature a lower interest rate, and the terms will make payments more affordable and more easily managed each month. In the best of circumstances, your debt will be paid off more quickly and at a lower overall cost.
Debt consolidation loans: How are they structured?
In some cases, a debt consolidation loan may deliver monthly financial relief but still cost more in the long-term. This is because some loans drag out your repayment schedule, which increases interest payments.
So it’s important that you understand the terms of the loan and how they affect the total cost. There may also be loan origination or application fees that increase the cost of the loan.
Debt consolidation lenders compared
Debt consolidation lenders vary in their lending requirements, and some lenders are not reputable. There are lenders that charge exorbitant upfront fees, making a consolidation loan an expensive choice.
If you decide to apply for a debt consolidation loan, be sure to compare lenders and read reviews before you make your decision.
Minimum requirements for a debt consolidation loan
When you apply for a debt consolidation loan, you’re asking a lender to extend credit so you can solve your debt problems. Sounds somewhat risky for the lender, doesn’t it? Because of this, lenders have minimum requirements for approving a debt consolidation loan.
Credit history – While you don’t need perfect credit to qualify for a personal loan, most companies do require a good to excellent credit score. Lenders use your credit score to assess risk; your credit score is also a factor when determining the interest rate you’re offered.
Proof of income – Lenders want to see that you have a steady income and a solid employment history. You might need to submit pay stubs or recent tax returns.
Financial stability – Other signals of financial stability include living in the same place for a long time and your debt-to-income (DTI) ratio. If your total monthly debt payments are more than 36% of your gross income, you might have a difficult time borrowing money.
Equity – Some lenders may ask for security before approving your application. If you’re a credit risk, the lender wants to be sure that they’ll get their money back. You may be asked to sign over collateral in the form of a home, property, or vehicle.
The application process
The application process for a debt consolidation loan is simple. Once you’ve found a lender that meets your criteria, complete an online loan application.
They will ask you for basic information about your debts, income, and other monthly bills. If documentation is required, you can submit this with your application. The lender will also pull your credit report and credit score before determining whether or not you qualify.
In addition to the four minimum requirements listed above, a lender will also consider a few additional items when you apply. Among these are the total amount and the loan’s term. For example, a loan request for $30,000 may be given more scrutiny than one for $5,000.
Preparing to apply
If you want to apply for a personal loan for debt consolidation, you can increase your chances of success by being proactive. Pull your credit report to see if there are any inaccuracies. If there is anything wrong on your report, dispute the items quickly.
If your debt-to-income ratio is high, pay off as much debt as possible before seeking a loan for the remainder. Also, avoid any late payments that could damage your credit and don’t change jobs or apartments until after the loan is approved.
What happens if you don’t qualify?
Even if you take careful steps to prepare your credit and your loan application, you may still find you don’t qualify. Lenders reject loan requests for a wide variety of reasons, so if this happens you’re not alone.
Lenders are required to explain why they denied an application if their decisions are based on information obtained from your credit report. This information could be helpful when preparing to make future loan applications. In the meantime, you still have other options.
Alternatives to personal loans
If you can’t qualify for a personal loan, filing for bankruptcy is another option, though you should view this as a last resort. A bankruptcy will remain on your credit report for ten years, and bankruptcy proceedings can be costly.
Another alternative is debt settlement.
Why debt settlement could be an option
A debt settlement arrangement isn’t a loan. Instead, the debt settlement company works with you to negotiate with your creditors in order to arrange a debt reduction. During the negotiation period payments are made to the debt settlement company. The settlement account builds but because payments are not made to creditors the accounts go into default status. This gives the debt settlement company leverage to persuade creditors to accept a reduced payment to settle the accounts. Reductions may be as much as 50% on the balance(s) due.
Debt settlement isn’t for everyone, but these programs offer you the opportunity to regain your financial freedom within 2-4 years. A debt settlement company collects certain fees, and there are credit score implications for using this approach, so be sure to understand the pros and cons before moving forward. Is debt settlement right for you? Explore your options depending on your level of debt and receive a free savings estimate.
There are various ways to get out from under stressful debt and regain your financial freedom. Debt consolidation is a good option because it makes it possible to merge your debts under a single, more manageable loan. Careful comparison of lenders will help you find the right personal loan to consolidate your debts. Get the information you need – read reviews of online personal loan lenders here.