Many people struggle with debt. As a result, there are a lot of products out there to help bring debt back under control. One good option is debt consolidation. However it works best under certain circumstances, so let’s take a look at how to know when you should a debt consolidation loan and what is debt consolidation
Good Credit Score: Lenders make loans with the expectation of making a profit. Due to this, if someone is a high-risk borrower, they are going to need to pay more interest to make the loan worthwhile for the lender. Thanks to this, if someone doesn’t have a good credit score, they either won’t be able to get a debt consolidation loan or won’t be able to get a debt consolidation loan with a low interest rate.
The interest rate has a huge impact on how much individuals can expect to pay, which in turn has a huge impact on how manageable the rate will prove to be. The best rates go borrowers with a 690 or above. You’ll have to make sure the interest rate on your consolidation loan is less than you’d pay on average for the debts you’re consolidating, or you might actually lose money on the deal.
As such, if a person has a bad credit score, they should spend a few months making their payments, paying off their outstanding balances, and otherwise working on their creditworthiness until they can get a debt consolidation loan that will help them with their debt management goals.
Reasonable Debt Amount: Consolidation loans work best when you have enough debt to make it worthwhile but not so much as to make it futile. The first part is important because the benefits of a debt consolidation loan won’t be worth the effort of getting one unless you have a lot of debt. Meanwhile, a debt consolidation loan won’t help bear the weight of an unbearable debt burden. A good rule of thumb is to use a debt consolidation loan if the monthly payments are less than 40 to 50 percent of your monthly income. If they are more than that, it’s better to consider another solution such as a debt settlement.
Ability to Stop Borrowing: Finally, even the best debt consolidation loan won’t help unless you stop the behaviors that got you into debt in the first place. In other words, you’ll need to stop borrowing because if you continue, you’ll dig yourself deeper and deeper into debt.
Also, you should have a plan to pay off your debt consolidation loan as fast as possible because that will result in a much less expensive loan in the long run. If people cannot capitalize on the opportunity presented to them by a debt consolidation loan, there is no point in making the effort to get one.
Further Considerations: If you answered in the affirmative to the question, “Should you use a debt consolidation loan to pay off debt,” you should still contact your potential lender with any questions you may have about the process and what you can expect. Seek out a different company if a lender balks at answering any questions, or over promises. You should also contact your state’s attorney general to check for any complaints If you’re uneasy about the company in which you’re interested. Above all, don’t shy away from a debt consolidation loan. If you understand the process, and see that it can work for you, take the plunge and improve your life.