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May 11, 2022
If you carry balances on numerous credit cards or have other outstanding unsecured loans you pay monthly, you may have thought about combining them so you only have one payment each month; this is known as debt consolidation. Specifically, debt consolidation is when you take out a new loan to pay off all or some of your old loans. A personal loan used to consolidate debt ideally lowers your overall monthly payments or reduces the interest you’ll pay, with a term that fits your needs, and a payment date that aligns with your other monthly obligations. Before you use a personal loan to consolidate debt, you should do some research. Here are some questions to consider before you apply for a loan:
1.What Are the Interest Rates?
It generally makes sense to switch from multiple high-interest-rate loans to a single lower rate loan. However, it is important to be careful and fully review all your loans. High-interest-rate credit cards may seem like an easy switch, but only if you are not able to pay the full balance each month. Many student loans generally have competitive interest rates and added perks such as loan forgiveness and forbearance periods. If you decide loan consolidation may be a good option, compare the new terms, fees, and interest rates to that of your current loans.
2. Will the Loan Offer Fixed Interest Rates?
Credit card interest rates may increase at any time. If you applied for a credit card at a low interest rate that soared to double-digits, a large portion of your monthly payments may now be going toward interest. If you only make minimum payments, it could take years to pay off your balance while you continue to accrue interest.
Not all consolidation loans offer fixed rates. A variable rate that’s tied to the prime rate may be an option in the foreseeable future with the Federal Reserve Bank raising interest rates and inflation on the rise. A fixed rate, on the other hand, can be locked in for the duration of the loan.
3. What is the Repayment Period?
Another important consideration is the length of the loan agreement. A high-interest-rate loan may not be a bad scenario if you are almost done paying it off. A new loan may come with fees and will have a new term of repayment, so be sure to compare the loans you have against the term length for a consolidation loan. Also compare debt consolidation loans against one another.
4. Will There Be Upfront Costs?
Be sure to ask the lender if there will be any type of origination fees, balance transfer fees, closing costs, or annual fees before you take out a debt consolidation loan. Then, decide if the lower payments or interest rate over the length of the loan will help offset such additional costs.
5. Will it be a Secured or Unsecured Loan?
A secured loan is one you guarantee with an owned asset. For example, you can take out a loan by using an automobile or other property that you own. With secured loans, you commit to forfeit the asset if you don’t meet the terms of the loan. An unsecured loan is one that relies on your credit and perceived ability to pay. Unsecured loans may have higher interest rates or only be available for smaller loan amounts due to the lack of collateral for the lender.
6. How Will the Loan Affect Your Credit Score?
Using a consolidation loan to pay off revolving credit lines may reduce the credit utilization rate that is included in your credit report. A utilization rate under 30% may help improve your credit score. Also, if you frequently forget to make payments on your small loans, you may do harm to your credit. One loan—especially if you enlist in automatic recurring payment via autopay—may be easier to remember and manage.
7. Do You Have the Cash Flow to Make a Larger Payment Each Month?
With a debt consolidation loan, you may have one larger payment once a month rather than numerous smaller payments throughout the month. Make sure you have the funds to make the larger monthly payment.
Whether you are looking for a loan to cover an unexpected expense, assist with debt consolidation, or some other need, Mariner can help you navigate the process. Apply online or locate your local branch now.[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container][fusion_global id=”3780″]