The debt consolidation process is only one option you could employ to improve your financial situation. It’s basically a method to repay some or all lines of credit to get a loan better suited for your financial objectives.
Reasons to Consolidate Debt
There are many personal advantages that allow the consolidation of a personal loan an attractive possibility to look into. Here are some of them.
Pay Off Credit Balances
The process of paying the balances of the credit card balances through the help of a personal loan could help you reduce interest costs, boost your credit score, and shift your debt from revolving into installment debt, as well as other advantages.
Revolving debt is one type of debt that a lot of credit cards make use of. The credit limit is set that you are able to use as much or as little of your credit limit as you want with no obligation to pay a fixed quantity or make a set amount of payments. The majority of consumers’ credit cards are classified as credit cards that are revolving credit which means that the sum you utilize can have a significant impact on your ratio of utilization as well as credit score.
Installment debt has a monthly installment with a beginning and an endpoint, like the mortgage, auto loan, and student loans. Making a timely payment on these loans improves your credit score because it shows the lenders that you’re trustworthy and able to handle payments over a long period of time. When you pay off your debt using the help of a personal loan and move your balance to an installment loan, you could notice an improvement in your score. Also, the plan for payment could aid in getting rid of debt permanently (and reduce the cost of interest over the course of your life).
Lower Your Interest Rate
Perhaps you’ve taken a few positive steps towards getting your finances in order or perhaps you’ve recently been awarded an increase at your job. Situations in the financial realm change frequently, which means you could be able to obtain a better rate of interest on a personal loan than the existing rate for your previous line of credit currently have.
Let’s say you owe $15,000 of credit card debt. The credit card is rated at a 17.99 percent rate of interest rate/17.99 APR. you’re making the minimum monthly payments. You’ve recently analyzed your options for consolidating debt and can qualify for a 36-month personal loan with a 12.5 percent rate of interest rate/15.742 APR of 1.
If you opt to keep paying the minimum amount on the credit card, it’ll be 253 years to finish the repayment and you’ll be paying $14,581.65 in interest total. When you combine your debt using the personal loan offer, you’ll get all your debt paid off within 36 months, and you’ll only be having to pay $3,064.96 in interest, which will save you $11,516.69 in interest for the rest of your life.
The credit card example above assumes an account with a balance of $15,000, making monthly payments equal to 3percent of the balance remaining with a minimum of $20, at 17.99 APR % as calculated by using the CreditCards.com Minimum Payment Calculator. This is compared to the Rocket Loans Personal Loan of $15,000 with interest and an origination charge of $675.
Lower Your Monthly Payment
Flexible repayment terms that lenders provide allow you to alter your loan amount and interest rate to suit your financial objectives. If you’re looking to lower your monthly installment then you might consider consolidating your current personal loan to a 60-month term personal loan. More lengthy terms generally permit you to make less per month which means you’ll have additional money that can be used to fund another goal, such as saving for the down payment on a home mortgage or a higher monthly contribution to your 401k plan or an emergency fund.
Shorten Your Term
Personal loans can assist you to manage your finances. Instead of having to make the minimum amount of payments for your credit card over the years ending, personal loans establish realistic plans for payment to assist you in getting out from debt within a short amount of time and reduce your total interest over time. In the above example (based on the data provided by the calculator for minimum payments on CreditCards.com) it would mean that you are able to “save” 217 months (or about an 18-year period) of payments through a fixed and affordable monthly payment that lasted for 36 months.
By transferring all of your unsecure debt to the personal loan, you’ll only be required to pay one bill to make every month.
How to Consolidate Debt
While consolidating debt isn’t the best option for everyone in all circumstances but it can greatly enhance your financial position when it is a good idea. Here’s how you can do it.
Do Your Research
Before you decide on what you’re eligible for, you should determine what you’d like to consolidate:
- The first step is to check the balances and the rates on your credit cards to assess your current rates against the new rates. You may consolidate some or all your debts as well as the lines of credit that you might have from retail stores.
- Next, review the options available to you for free. It is common to view the options you have after filling out the form in a short time and then assessing your rates won’t hurt any credit score.
- The final step is to evaluate the rates of your cards and decide on the amount you would like to consolidate. It is not necessary to consolidate all your accounts to take advantage of one payment. However, if all your cards are charged at rates that are higher than the current offers, you may be able save money by merging the cards. When deciding on the amount you want to use make sure you check the origination cost for your loan. Origination charges are deducted from the loan funds prior to being transferred to your bank account So keep this in mind when choosing an option should you’re required to borrow an additional amount to cover all expenses.
Apply for a Personal Loan
Once you’ve selected the option that you like The final step of the process is straightforward Once you’ve made an application for the loan you want to make sure you verify your details and then sign the loan! After the loan is approved, you will receive your funds within the next day.
You know the best way to do it, but what exactly do you require? What documentation do you need to keep in your possession and what other requirements must you know about? Here are just some other things that they will be looking for:
- DTI (debt-to-income) ratio under 30%
- Excellent to excellent credit
- A good history of payment (meaning that you’ve paid your bills on time)
- The lines of credit (and ensure that you haven’t recently opened many)
- Employment verification
- The income proof you need to prove that you’ll be able to make your loan repayments
If you believe you have the requirements and are looking to pay the balance of all of your credit cards or any other high-interest debt You can start and look into the options available.