Debt consolidation can be an excellent option for people who have a high volume of debt from numerous sources. Fortunately, how debt consolidation works is also straightforward and easy to understand. Most forms of consumer debt, including credit cards, lines of credit, personal loans and etc, can be combined into one loan. Typically offered at a lower interest rate (with a good credit score), consolidation loans allow individuals to pay off their debt in one convenient monthly payment to a single source, instead of paying high interest for multiple loans.
How Do I Apply for a Debt Consolidation Loan?
While it’s an easy process overall, if you’re not familiar with it, you can inquire with your loan representative to determine if you qualify. While it’s a great opportunity to manage a large amount of accumulated debt, not everyone is eligible for it. Two benefits that work in your favor if you apply for debt consolidation include having property or collateral to offer and a good credit rating. These are two ways to improve your chances of getting a debt consolidation loan to cover all your current debts. Be apprised though, taking a secured loan to consolidate debt does have a rather significant downside. You’ll forfeit your collateral if you default on the loan.
What Happens When I Qualify for A Debt Consolidation Loan?
Once you passed the application process and approved the loan, the rest of the work is easy! You’ll have all your credit card debt, personal loans, and other debt combined into a single, large loan. The debt consolidation loan will have a relatively lower interest rate to pay off.
Once the monthly payments are scheduled, you’ll have extra money available that will help you finally get ahead. However, key to understanding how debt consolidation works, is that you resist adding new charges to your accounts until the consolidation loan is paid off. Otherwise, you’ll be digging a hole while trying to climb out of one.
You Might Need a Co-signor
A good credit rating is key to securing an interest rate capable of making the debt consolidation a beneficial undertaking. Looking for a co-signor can help your chances if your credit score is an inhibitor.
Maybe you have a close friend, family member or some other relative with a strong credit history who can sign as a guarantor. However, before you ask for this help, make sure that person understand this role’s responsibilities and they are willing to fulfill them. Make sure they know they’ll have to pay if you default.
What Can I Do Before Considering Consolidation?
Before you consider a debt consolidation loan, taking some steps to reduce your overall debt can increase your chances of qualifying, they might even alleviate the need altogether. Try to work out a more favorable payment plan with your creditor, or find out if you qualify for a lower interest rate. If you have extra income or a second job, you can use the income to make larger payments. Adapting to a strict budget may seem challenging, though this can be a great way to reduce spending and help you get ahead on all those bills!
Even with all the steps you can take to reduce debt and tackle high-interest rate payments, many individuals find their resources for assistance limited. At this point, considering a debt consolidation loan is one of the best options. Understanding how debt consolidation works is the first best step toward using this approach to make your obligations easier to fulfill.