There are many types and avenues of debt consolidation. One of the ways you can consolidate is through the use of a personal loan from different types of lenders. In this article, we are going to look at a rough path designed to help you make the best out of your debt consolidation plan.
The rationale behind using personal loans for debt consolidation
Personal loans generally have lower interest rates than credit card debt and other smaller loans. Debt consolidation involves taking out a personal loan and using the money to clear all your existing debt within a short period of time. You are then left with one loan that you have to clear rather than servicing multiple loans at the same time. When well executed, you can save money on your debt repayments by negotiating lower interest rates and fees than your original liabilities and debts. Financial experts estimate that the APR on credit card debt is on average 20%, which is a substantially higher than what most personal loans cost. Small loans also tend to charge much higher rates than larger ones. For this reason, it often makes more financial sense to instantly pay off your many small debts and continue servicing the new loan.
How to go about Debt Consolidation
1. Perform Extensive Due diligence:
The first step when considering a personal loan to consolidate your debt is to perform all the due diligence. This involves careful review of your remaining debt, credit score and weighing available options. Do all the calculations diligently, ensuring that all the debts and fees are included. The most ideal scenario is to ensure that the personal loan will save you money by the time you are done repaying it. Create a crystal clear outlook on what your future repayments and income look like to ensure that the whole endeavor is worthwhile.
2. Make a Plan:
Once you are aware of the debt burden that faces you, put in the necessary preparations to make the best out of the facility. These steps include improving your credit score, selecting the best package and making a spending plan. One way to improve your credit score is to pay off small outstanding debts that may be affecting your credit. You can also request a copy of your credit report and ensure it does not contain any errors. Next, weigh a number of bank options at your disposal to make sure that you get a sufficient amount to cover your outstanding debt and at a rate that is not burdensome to you. Another important aspect of this step involves getting a handle on your spending. This ensures that enough money is left to cover your loan installments and that you won’t balloon your debt further by overusing your credit card. Continuing to spend unsustainably using credit defeats the purpose of consolidating your loans since your debt stays high.
3. Apply for the loan:
Once you have picked a suitable loan offering from a great lender, it is time to go ahead with the application process. Rather than solely relying on banks and other mainstream lenders only, you might want to consider some fringe options which may offer more attractive prequalification and repayment terms. Although they generally require lengthy membership as a precondition, credit unions generally offer lower interest rates than conventional lenders and are very friendly to people with less than stellar credit. Another option for people with bad credit is online loan channels, though you should be wary for scams and high interest rates.
Once you apply for the loan it may take a few days or weeks to get approved or declined.
4. Make the payments:
You can choose to deposit the money into your credit accounts or have the disbursing lender deposit it directly into your collectors’ accounts. It is advisable to make the payments as soon as you acquire it to avoid unnecessary interest and the temptation to divert the money to other uses. As a final step you might need to close some of the accounts to prevent fixed charges. It is also prudent to communicate with the lenders and credit bureau to get official confirmation of the debt closing.
Resources:
1. https://www.moneyunder30.com/personal-loan-debt-consolidation
2. https://www.usatoday.com/story/money/2019/06/08/how-consolidate-debt-follow-these-5-steps-using-personal-loan/1374639001/
3. https://www.nerdwallet.com/blog/loans/consolidate-credit-card-debt-personal-loan/
4. https://themortgagereports.com/51114/how-to-use-a-personal-loan-for-debt-consolidation
