​Ever Heard of Debt Consolidation Loan? Here’s What You Should Know

If you are struggling to pay off your multiple debts, taking out a debt consolidation loan is one way that can help you manage and pay these debts. It's a personal loan that can turn your multiple debts into one single debt. It means you'll probably have to make one monthly payment to pay off all your existing debts and, ideally, a lower interest rate.

What is a Debt Consolidation Loan?

A debt consolidation loan can transform your multiple existing debts into one single payment. When it comes to this type of loan, you need to apply for a loan with the total amount you owe on your existing debts.

Once that loan gets approved, you can use the funds to pay off the balances of your existing debts. After that, you just have to pay off the new loan over time.

How To Apply

Applying for a debt consolidation loan requires legwork. However, this type of loan can help you save money. Below are the steps you should take in applying for a debt consolidation loan:

Understand Your Finances

It's vital to check your credit score before you apply for any type of loan. Doing so can help you assess where you currently stand financially.

A good or excellent credit score can help you land a loan with favorable terms and a low-interest rate. However, if you have bad credit, it's recommended to work on ways to improve your credit score before you apply for a debt consolidation loan.

Shop Around

Comparing lenders can help you find better loan terms and can even help you save money. It's best to get quotes from multiple lenders such as banks, credit unions, and online lenders like CreditNinja. Doing this will allow you to compare the interest rate, loan term, monthly payment, and loan fees.

Get Prequalified

Going through the prequalification process allows you to take a sneak peek at what to expect if you apply for a loan. If you choose to prequalify, the lender will perform a soft inquiry on your credit, which will be the basis of the prequalification assessment and not hurt your score.

Gather What You Need

You should gather what you need if you have decided to apply for a debt consolidation loan.

For example, you might need your contact information, Social Security number, monthly debt obligation estimates, and proof of income. Ask your lender to ensure you can get all the necessary documents to complete the application process.

When Does Taking Out a Debt Consolidation Loan Make Sense

Below are times when getting a debt consolidation loan makes sense:

Good Credit Score

As mentioned earlier, a good credit score can help you get a debt consolidation loan with a low-interest rate and favorable terms. However, a debt consolidation loan is the right option for you only when it can help your debts become more manageable and save you money in interest. Otherwise, it can drag down your finances.

High-Interest Debt

According to Experian, a personal loan’s average interest rate is 9.41%. If you can qualify for a debt consolidation loan with a lower interest rate than what you currently pay in your existing debts, you can save more on interest charges.

Repayment Plan

One of the risks of having a credit card is that it's a revolving credit. It means there is no set repayment plan, and you are free to borrow and repay on an ongoing basis.

On the bright side, taking out a debt consolidation loan means you can have a set repayment plan, which can be a great solution if you want to push for a plan and stick to it.

When It's Not a Good Idea To Take a Debt Consolidation Loan

A debt consolidation loan is a great way to manage your debt. However, there are situations when it might not work for you:

Spending Issues

A debt consolidation loan may not work if you don’t want to change your spending habits. It can help free up available credit on your credit card. However, if you transfer the debt and continue swiping your card for multiple purchases, your financial situation might worsen.

Bad Credit

Getting approved with a personal loan is possible even with bad credit. However, if you want a debt consolidation loan, it's best to get one with a low-interest rate, which is challenging for a borrower with bad credit.

To Sum It Up

A debt consolidation loan can help refinance your debt. It can turn all of your multiple existing debts into one single payment, which makes it easier to manage. However, it's vital to know that getting a debt consolidation loan doesn't always make sense. So, it's best to evaluate your current situation before making that financial decision.