Nothing is as quite frustrating as receiving (sometimes harassing) calls from multiple lenders, oftentimes to remind you that you are behind on your loan payments. It’s even more nerve-racking if a few of those loans are the high-interest kind, and your income for that month or period isn’t sufficient to comfortably settle all your loan repayments as expected.
However, you don’t always have to play cat and mouse or put up with a mountain of depression just because you owe several lenders.
As long as you land on a good loan deal, a debt consolidation loan can be a considerable way out of the ordeal. But since it’s a debt just like any other, it is important to understand the loan terms, including the interest rate, payment structure, and loan term before taking out a debt consolidation loan.
The following pointers should go a long way in helping you make an informed decision.
What’s A Debt Consolidation Loan?
In the simplest of terms, a debt consolidation loan is a loan borrowed for the purpose of clearing out all other outstanding debts.
Consequently, you are left repaying a single debt, meaning that you’ll virtually be dealing with just one lender. And, oftentimes, the loan terms are much more favorable when it comes to the interest rates, repayment plans, and penalties, among other things.
Advantages of Debt Consolidation Loans
While a debt consolidation loan won’t precisely leave you free from debt, it can make your financial burden a tad bit easier, and in various ways.
Some of the advantages you can expect include:
- It may lower your monthly loan payments
- It might improve your credit score
- You can get out of debt faster
- Possibly lower interest rates
- It can help you streamline your finances
Crucial Factors to Consider When Seeking a Debt Consolidation Loan
Before getting a loan to consolidate debt, a few critical factors are worth considering. After all, it is supposed to solve your financial hiccups rather than add insult to injury. With this in mind, some of the most crucial things to consider when getting a debt consolidation loan include:
The Loan’s Interest Rate
The first thing you should check when seeking a debt consolidation loan is its interest rate. Most especially when you have credit card debt, some loans offer interest rates good enough to make up for the consolidation loan’s disadvantages, but in some cases, they can be pretty steep and can amount to a few thousand dollars in extra payments over a few years. However, you don’t necessarily have to consider an expensive loan just because it offers a favorable interest rate.
Are There Alternative Options?
As much as debt consolidation loans come with a myriad of benefits, it is important to weigh your options before getting one. Depending on your financial situation, sometimes all you might need is to check out several low-interest personal loans to see if you can get a great deal. And, speaking of interest, here’s another crucial point to consider if you must get a consolidation loan.
Consider Your Debt-to-Income Ratio
Some debt consolidation loans won’t help you much if you already owe a lot of money to the lenders. This is because, in some cases, the loan’s interest rate will depend on your debt-to-income ratio. And, after all, you don’t want a loan that will add to the financial stress you already have.
Loan Repayment Structure
A good debt consolidation loan will have several options, some of which can include a repayment plan that will see you repaying a single loan installment every month. Some loans may even stretch the repayment term a little bit to accommodate your repayment ability based on your income.
Choose the Right Lender
Once you’ve decided that a debt consolidation loan is the best way to go, it is crucial to ensure you approach the right lender.
Besides comparing interest rates, loan terms, and the repayment structure, it also pays to do some digging about your prospective lenders on things like:
- Lender reputation: Alongside referrals from friends and loved ones, online reviews and testimonials can help with this.
- Lender experience and legitimacy: Lenders without proper certifications should of course be out of the question.
- Lender specialization on consolidation loans: Providers who specifically offer consolidation loans are more likely to offer better rates and payment structures.
A debt consolidation loan can indeed be the solution to your financial woes. However, this is only true if you get it for the right reasons, understand its repercussions, and strive to get the best deal out there. When approaching the lender for one, the above piece has discussed a few things you shouldn’t forget to ask about.
