Becoming debt free does not happen overnight. Short of winning the lottery, it could take many years to pay down debt that has accumulated! In the case of credit cards, many consumers find themselves in a trap where they can only afford to pay the minimum payment which normally only covers the interest for the month. If this sounds familiar, or if you are being proactive and want to better manage your finances before they do get out of control, then consolidating your loans could be beneficial.
A consolidation loan normally benefits consumers in four primary ways:
- Instead of making multiple payments to various lenders, there will only be one payment due each month.
- In the case of high-interest credit cards, the interest on your consolidation loan would be much lower.
- The monthly amount due on a consolidation loan is generally less than the total of what was being paid on multiple loans.
- Consolidating several loans could reduce the amount of time to pay off the debt.
When you're searching for a loan consolidation solution, there are several steps.
First, understand the difference between secured and unsecured credit. Homes and vehicles would be examples of secured loans while credit cards and signature loans would be unsecured. If your plan is to use the equity in your home or vehicle to secure the consolidation loan, you need to be aware that if you default on the loan then your home or vehicle would be in jeopardy of being repossessed by your lending institution. Typically, unsecured loans have higher interest rates then secured, regardless of your credit.
Second, know your credit score. Having an excellent credit rating will provide you with more options and lower interest rates. For someone with bad credit, a secured loan may be their only option. Someone with excellent credit may be able to get a signature loan and not put their home at risk as mentioned above. Having a lower interest rate means lower payments and could expedite the amount of time required to pay off the loan in full. If you have bad credit it will be harder to find a consolidation loan with favorable terms.
Finally, only apply with reputable financial institutions. A web search for Consolidation Loans will return hundreds of results, many from lending institutions you have never heard of. If you decide to apply for a loan with a company which you are not familiar, then check them out thoroughly. The Better Business Bureau is an excellent online tool you can use to check out any business.
If you are successful at consolidating your debt then reap the financial benefits. A word to the wise? Avoid getting into further debt until your consolidation loan is paid in full.