Consumer debt climbed to $14.64 trillion in the first quarter of this year. This figure adds up mortgages, auto loans, credit cards, personal loans, student loans, and other consumer debt.
Some estimates say the average American carries close to $100,000 in debt. That’s a huge burden for anyone to carry.
In these uncertain times, you want to consider your options to get out of debt. Many people turn to debt consolidation to help them get a fresh financial start.
How does debt consolidation work? Read this guide to learn how to get out of debt through debt consolidation.
What Is Debt Consolidation?
Do you have multiple forms of debt? Debt consolidation is a way to combine those forms of debt into one predictable monthly payment.
Here’s how debt consolidation works. Let’s say that you have a personal loan for $5000 and carry a balance on two credit cards. You have a $3000 balance on one card and a $2000 balance on the other.
You have $10,000 in debt. Your interest rate on your cards is somewhere between 16% – 24%. Your loan might have an 8% interest rate.
You can take out a debt consolidation loan for $10,000 at a 6% interest rate. You use the funds from the loan to pay off your personal loan and credit cards.
Pay the loan back in monthly instalment payments. You end up paying less in interest and you clear up your credit card and personal loan debt.
How to Get a Debt Consolidation Loan
There are a few things you need before you sign up for a debt consolidation loan. Decide which debts you want to pay off. Calculate the amount of money needed to pay off your debts.
You’ll need to get your financials in order before you apply. Look at the monthly payments you make towards your existing debt. Note the interest rates on those debts so you can compare them to the debt consolidation loan.
Pull your credit report prior to applying for a debt consolidation loan. It helps to know if there are any surprises that can prevent you from getting a debt consolidation loan.
You need to have other documents ready for lenders. Proof of income and bank statements may be required to get the loan approved.
Check Best Offer on Myindigocard
Shopping For a Debt Consolidation Loan
You definitely don’t want to go with the first lender you see. Shop around for loans to compare interest rates and terms.
Be sure to get prequalified for a loan. This is where lenders collect basic information and give you an estimate of the loan terms and rates.
Prequalification doesn’t mean that you’ll get the loan. It also doesn’t affect your credit score.
Compare the length of the loan, the monthly payment, and interest rates. Get full transparency from lenders about fees for the loan.
Check online reviews for each lender. You want to know that you’re dealing with a reputable loan company. The level of customer service is often a tiebreaker when you compare loans.
Once you make a decision, fill out a formal application for the loan. You should have an answer in a few days. After that, the lender will deposit the funds into your account.
Does a Debt Consolidation Loan Make Sense?
Debt consolidation makes sense in a lot of cases. There are times when you should hold off on getting a debt consolidation loan.
One example is if you already have a good interest rate on your existing debt. Unless you can get an even lower rate on a debt consolidation loan, then it might not make sense for you.
Student loans are a big issue for many people in debt. Some of these loans have high interest rates, which may tempt you to consolidate these loans.
It’s not always the best choice, though. If you have loans from the Department of Education, you’re eligible for programs like income-driven repayments. You could be eligible for loan forgiveness under some of these programs.
If you consolidate your loan, you’ll have your loan under a private lender. This means you won’t be eligible for the repayment and forgiveness programs.
You’re better off consolidating debt like credit cards and leave your student loans where they’re at.
Paying Off Debt and Staying Out of Debt
One of the hard financial lessons that many have to learn is that good financial management doesn’t come easily. Too many think that a debt consolidation loan solves all of their financial problems.
While it does put you in a better situation by getting rid of debt, too many run up their credit cards again. That leaves them with a debt consolidation loan plus more credit card debt.
Lenders will catch on to this pattern, and you won’t be able to bail yourself out with another debt consolidation loan.
You have to address the financial habits that got you into debt to begin with. Once you get a debt consolidation loan, make a commitment to pay that off as soon as possible.
Put away your credit cards and don’t take out any more loans for a couple of years. You may have to cut down on some expenses, but it’s worth it.
Don’t close out your credit cards. That could actually hurt your credit score because you lower the amount of credit available.
How Does Debt Consolidation Work? Now You Know.
Consumer debt continues to creep upward, leaving many people struggling to pay off debt and save for the future. Debt consolidation is one way of paying off debts and getting a fresh start.
How does debt consolidation work? You decide which forms of debt you want to pay off. You get a debt consolidation loan at a lower interest rate. Pay off the loan over time and don’t run up your credit cards again.
For more helpful financial tips, check out the other articles on the blog today!
