Debt consolidation is an effective debt management strategy that involves placing all your debts into one loan. The resultant consolidation loan lowers your monthly payments hence this is considered an affordable option. The beauty of debt consolidation loans is paying money to one lender monthly rather than your current multiple accounts.
There is a catch though, your application will not be approved if you are unable to make the monthly payments or if you are considered a high-risk borrower but lack collateral. Your financial and general stability may also deter approval. Besides these deterrents, you need to choose debt consolidation when it suits you. Here are simple guidelines for choosing the best plans:
- Determine the kind of loan that suits you
Debt consolidation loans are either secured or unsecured. Unsecured loans are extended by peer-to-peer lenders or independent online lenders and you don’t need collateral for approval.
On the other hand, secured consolidation loans require valuable collateral for approval. This is suitable when you have poor credit and high debts. Security could be your home. Unfortunately, you may lose your home if you are unable to repay the loan in time.
- Affordability of the debt consolidation loan
Is the final cost of the debt consolidation loan affordable? The principal, interest, and associated fees must be factored to determine if you can afford the plan. Online debt consolidation reviews often highlight the lending rates on loans. To be on the safe side with the accurate estimate, use and compare all the APR values from different lenders.
Besides lower monthly payments, there should be savings at the end of the consolidation period. It is recommended that you pick a debt consolidation plan when:
- The overall amount to be repaid won’t increase
- You can keep up the payments from the beginning to the end of the consolidation plan
- You can comfortably afford the fees and charges. To get more on fees, you should take time reading the fine print to determine if there are prepayment fees. The best plans shouldn’t have prepayment penalties to encourage you to get off debt faster.
To get all this information, you have to patiently but thoroughly research.
- Get professional advice
There is wealth of information online. Despite the information, the reviews, and online recommendations, you may miss a few important bits. It is also easy to fall for scams and consolidation traps.
It may also be revealed that you do not qualify for the debt consolidation loan and an option like debt settlement may be more appropriate for your case.
- Avoid risky and unhealthy plans
Unhealthy debt consolidation plans risk loss of your home causing further damage to your financial situation. Rather than taking a home equity loan or line of credit against the loan, take up a low-interest credit card balance transfer option or take an unsecured loan.
- Avoid loan plans that do not make sense
These include plans whose interest rates increase monthly repayments, are unaffordable, have prepayment penalties, fail to clear all debt, or are extended for too long making the loan expensive.
- Are you eligible?
You should meet the eligibility criteria. Often, these include your income, credit score, credit ratings, overall stability and security.
Take home point: Before signing up for a debt consolidation plan, ask yourself if it will offer financial relief, if the alternatives are cheaper, and if you can manage the debt on your own. The best debt consolidation plan must improve your financial state.