9 Factors to Consider Before Taking A Debt Consolidation Loan

The current state of the economy has affected many individuals. Even though debt feels like a norm, it is a real pain when you walk around knowing that you owe money to many creditors. When trying to manage your finances, it is easy to accumulate debt especially when you use high interest credit cards. At the end of it all, you will find that you are unable to manage your finances and with a high number of bills payable monthly, it is easy to fall behind on some payments or to forget other payments.

With time, you will have a bad credit and managing that is more difficult. Fortunately, debt consolidation is there to help you manage your debts and finances as well. Debt consolidation involves consolidating all your loans into one loan, paying off the creditors and then you are left with one loan to service. Often, debt consolidation loans have lower interest rates and they are manageable.

However, even with the reduced monthly repayment rates, you should reconsider your decision and re-evaluate the packages offered by different service providers. As you do this, keep the following considerations in mind especially when you have bad credit. These considerations include:

  1. Loan repayment term

You have to look at the time it will take you to repay your new loan. If the duration offered is long, you will find that your monthly repayment rates will be lower. However, there is a catch, the low monthly repayment rates spread over a long duration increases the total amount payable later due to the high interest rates. Ensure that the monthly payment rates are manageable for you but affordable in the end.

  1. Interest rates

There are fixed and variable interest rates for debt consolidation loans. The variable interest rates for the loan are definitely flexible but the fluctuation in rates may affect your ability to repay in some months when the rates are too high. Variable interest rates are affected by the market and you cannot predict how much you will pay.

A fixed interest rate on the other hand is effective when you are looking for a system that will make it possible for you to reorganize your finances, plan well, and stick to the created budget. Your intentions should be clear when taking the loan so as to determine your best way to better finance management.

  1. Type of loan

There are two types of debt consolidation loans that will be introduced to you as you look for a debt consolidation plan. These are the secured and the unsecured loans. The unsecured loan is the best when you do not have a home or you do but you aren’t willing to put your home at risk. However, if you are looking for debt consolidation for bad credit, then the only option and the loan availed to you will be a secured loan especially if you own a home. This however puts your home at risk especially when you have to repay the loan for a long time.

  1. Use of credit cards to transfer credit

Is the highest percentage of your debt made of accrued credit card debts? Talk to your financial consultant or the institution you transact with for transfer of your credit card debt balances into one credit card. This will give you one loan to repay monthly.

In other cases, you can get a 0% interest rate for the credit cards balance transfers. Though this is limited for a few months, it is appropriate if you know that you can repay the debt within that time. Unfortunately, most institutions decline this arrangement for persons with bad credit.

  1. Amount to borrow

The amount that you will borrow for debt consolidation will affect the type of loan available for you and the interest rates charged and the available packages are limited if your credit is in bad shape.

Note that you will pay a higher interest if you make the mistake of borrowing more than you need or more than the cost of your debt. To be safe, calculate the exact amount needed for the debts to be covered fully. You may talk to a credit counsellor or a personal banker if you are unable to compute the values as it should be done.

  1. Fees

You should be aware of arrangement and transaction fees. How will the fees affect the total repayable amount? Ask for information on the cost of the arrangement, setting up the loan, phone call costs, and any other charged fees. Include these costs to the total amount that you will be repaying monthly.

Some of your banks may charge you for repaying your loan before term. Will you afford the charges and will the total repayable amount for the debt consolidation loan be too high.

  1. What is out there?

If you have bad credit, your loan choices will be limited. The interest rates advertised by debt consolidation companies aren’t applicable to your bad credit case and the rates put are the Annual Percentage Rates. Call the companies to know the loans available for you and compare the interest rates available. Go for your best case rate after considering the repayment rates.

  1. Your eligibility

You aren’t guaranteed a debt consolidation loan just because you have too many creditors to repay monthly or because you keep forgetting some repayments. You have to keep in mind your age, your income, the frequency or regularity of your income, and your residence.

If you have poor credit, then the search will be longer. Not all debt consolidation loan companies extend the service to individuals with low or poor credit. These details are important because they show if you will be able to repay the new loan or not.

  1. The debts

Education loans from private institutions may not be approved for debt consolidation. Personal loans, government student loans, credit card debts, rates, outstanding bills, and tax debt will be consolidated.

In conclusion, the debt consolidation platform is there to ensure that you manage your funds and get rid of unnecessary debt. You should ensure that you only take a debt consolidation loan when you are ready to change your lifestyle and manage your finances.