Published on June 22nd, 2019
If you are carrying too much debt, then it might be time to look into consolidating your loans. When payments start to build, it can be difficult to make them on time and pay more than the minimum. With debt consolidation, you can pay off your loans quicker than if you maintain the status quo.
In most cases, when you consolidate your loans you put all of your debt into one loan. Then you only need to make one payment each month. Information about consolidation loans should include the interest rate and length of the loan, which can both vary based on your credit score. Before you commit to a consolidation loan, you should investigate how your credit score affects your payments.
Reasons To Consolidate Your Loans
There are several questions you should ask yourself to decide if a consolidation loan is a good choice for your financial situation. Loan consolidation can be useful if:
- Your paycheck is gone before you pay your bills
- You have too many loans to remember
- You can control your spending, but your balances do not decrease
- You are getting regular calls from debt collectors
- Your debt is over $7500
- You are ready for change
Steps To Take Before You Consolidate Your Loans
Once you make the initial decision that you need to do something to fix your financial status, there are several steps to take before you actually apply for the loan. It is important that you get all of the facts so you can make an educated decision.
1. Know What You Owe
Before you apply for a consolidation loan, you should understand exactly what you need to pay off. This involves making a list that includes your balances along with interest rates, lenders, and expected time of payoff.
After you see everything on paper, you might find that you do not need a consolidation loan. But, you might see that you do. No matter what, you will get the facts about your financial status and you can use those facts to make a wise decision.
2. Get A Credit Report
Your next step is to get a credit report from one of the many credit bureaus. Most will give you at least one free credit report each year, so take advantage of this opportunity. Get one now and get another one later in the year, so you can see if anything has changed. If you have credit card debt, your credit card lender should send you a report if you request one.
Once you receive the credit report, compare it to the list you made of the money you owe. Check the details to be sure that the credit report is accurate and check your list to be sure you didn’t miss anything. If you find that something on the credit report is wrong, let the reporting agency know. There are rules about disputes and credit agencies will investigate the claim within 30 days of the notification.
Since there are several different credit reporting agencies, you might want to check one or two of them. The various credit agencies have slightly different models, so your reports could have dissimilar numbers.
3. Speak To An Expert
Before you commit to a new loan, it can be helpful to speak with a loan consolidation expert. If you work with a local bank, a loan officer can talk to you about the pros and cons for your financial status. There are also credit counselors who can help, too. Many online websites that specialize in consolidation loans have counselors who can talk to you.
You might have to pay a small fee to work with a credit counselor, or you might have to apply for a loan to have the fee waived.
When it comes to financial information, it is a good idea to get all of the information you can. This way, you can make a wise decision that will save you money in the long run. Remember, a consolidation loan is exactly what it sounds like, another loan. So, it is important to understand whether or not it is something that will help you.
4. Shop Around And Learn About Your Choices
A consolidation loan will add more debt to your credit report, at least for a little while. The loans that are covered by the consolidation loan will remain on your credit report. They will show up as being paid, but it can take time. Therefore, you should research your options before you commit to any new debt.
Consolidation loans can come from a variety of sources: banks, credit unions, and online lenders. Your loan could be secured or unsecured. Depending on your credit score and amount of debt, lenders might ask that you give some equity up in exchange for the loan. This is a secured loan and the security will come from something that you have that is valuable – like equity on your home or the title of a vehicle that you own.
If your credit is good, you might be able to get an unsecured loan. This means that you do not have to give up anything to get the loan. Regardless of the type of loan, you should be sure to look into the rates, length, fees, and penalties that come with the loan. Some lenders penalize you if you pay off the loan before the date of the final payment. Some will charge large origination and closing fees. Some might have low interest rates, but long lengths, so the lenders still make a lot of money off of their products.
If you are really trying to benefit from a consolidation loan, you should get a rate that is lower than the lowest credit card rate you are already paying. You should also be able to pay off the consolidation loan before you would pay off your existing debt. If you cannot better your situation, then you should keep doing what you are doing. Be sure to look at the whole picture, not just the monthly payment amount.
You might find that it is in your best interest to not get a consolidation loan. Some people are better off getting a second job or setting up a payment plan with their existing lenders. A consolidation loan is one option in a field of many options.
Before you commit to a lender, check reviews so you can see if the lender is legit. People who want consolidation loans are often taken advantage of by predatory lenders. With due diligence on your part, you can be sure that you are working with a top-notch lender.
5. Get Your Documents Together And Apply For The Loan
If you decide that a consolidation loan is for you, then you should apply as soon as possible. There are usually several steps involved in applying for a loan, especially if you have to put up some collateral. You will most likely need to verify your identity and show proof of employment. If the loan is for a big dollar amount, you might have to show tax forms from two or more years. Ask your lender for a list of documents that they need to see so you can get them ready in advance.
Steps To Take As You’re Paying Off The Consolidation Loan
Once you get the loan, there are a few things you should do to experience success in paying of the money you owe. Your previous debt doesn’t disappear; the consolidation loan pays for it and you pay back the money you owe to your new lender. These steps will help you stay in control of your finances so you do not need to get another consolidation loan in the future.
4. Cut Up Your Credit Cards
Do not cut up the credit cards until the proceeds from the loan have paid them off. Once that happens, close the accounts and cut up the credit cards. Then, do not get any new credit cards, as tempting as it may be.
Once you close your credit cards, your credit score might change as your credit utilization changes. Eventually, the only loan you have will be the consolidation loan, so your utilization could be at 100%. Some people will keep their credit cards open, but not use them, to keep their utilization numbers low and the credit scores high.
This does require a bit of discipline to not use credit cards, especially when you have been using them at a rate that made you get a consolidation loan. But, you can do it, especially if you put your mind to it and work on saving money and spending only what you can afford.
2. Control Your Spending
To maintain control over your finances, you will need to control your spending. It is helpful to set a budget to see what you have available each month to save and spend after your obligations are covered. Even if you have money left over, it doesn’t mean you should go crazy spending on unnecessary things.
If you can convince yourself that you should only buy what you need, you can keep your spending under control. It can also be fun to watch a savings account grow, so start saving by setting aside a certain amount after each paycheck. Then, don’t touch it. If you need to spend some money, make a bigger loan payment.