If you’ve ever carried a balance on credit card accounts with high interest rates, then you’ve experienced firsthand what it is like to see a significant portion of your payment go toward those credit card charges. interest rather than putting a dent in the balance you owe. This is one of the most frustrating aspects – not to mention the high cost – of using credit cards.
Consolidation loans offer some borrowers the opportunity to break out of this expensive credit card cycle, using the funds from a single loan to pay off high interest accounts. It’s usually easier to make fixed monthly payments than juggling multiple revolving credit card accounts.
Even though consolidation loans can simplify and speed up the debt repayment process for some borrowers, it is still important to shop around for a competitive product before applying. After all, you are committing to paying back a large sum of money, so you want to be sure that you are making the right decision before moving forward.
Here is what to look for in a debt consolidation loan.
Factors to Consider When Comparing Consolidation Loans
Just like credit card offers, debt consolidation loans vary depending on the borrower and consumer creditworthiness. These are some of the most important factors to consider when comparing the ins and outs of different loan offers.
Amount of the loan
As a general rule, only borrow the amount of debt you can actually pay it back within five years. This makes consolidation a potential option for people with medium debt. Those with much less debt can probably pay off their debts on their own with a little strategy; borrowers with the most debt may need to explore more serious options, such as settlement.
Some lenders offer consolidation loans for as little as $ 1,000, while others start higher, closer to $ 5,000 or $ 7,500. Likewise, lenders cap their loans at different amounts.
term of the loan
It may seem worthwhile to choose a long loan term, such as seven years, to reduce your monthly payments. However, this can be a recipe for paying more in the long run. Experts in debt consolidation loans generally advise consumers to get the shortest possible loan that still allows monthly payments within your budget.
Annual Percentage Rate Range (APR)
A deciding factor in determining whether a consolidation loan is worth it is the APR you qualify for. Your credit rating will be the most important determining factor here, although different lenders offer loan products with different APR ranges. Interest rates on consolidation loans tend to vary from about 6 percent to 36 percent.
This is where looking for the best rates and trying to optimize your credit score before applying will play a major role in the end result.
Credit score requirements
Some lenders set the minimum requirements necessary to qualify for their loan products. Some lenders will approve borrowers with lower credit scores, although they will likely set their interest rates at higher interest rates to offset the increased risk they have taken on.
Knowing the minimum requirements set by a lender before you apply can help you avoid wasting your time and allow you to focus on the loans you are most likely to qualify for.
The goal in taking out a consolidation loan is not only to facilitate repayment, but also to decrease the amount that you will end up paying. That’s why it’s so crucial to watch the fees – and make sure they don’t outweigh the potential savings. Original fees are an example.
Researching these factors can help you choose the best debt consolidation loan for your situation.