Taken under the proper circumstances — and handled correctly — a debt consolidation loan can be manna from heaven. You’ll free yourself of debt more quickly and efficiently, you’ll lower your monthly payments and the interest charges you pay will be lower too.
However, all of this is predicated upon the nature of your situation and whether or not it is conducive to this strategy.
To help you make that determination, here’s what to do before applying for a consolidation loan.
Review Your Credit Report
You want to see what lenders will see before they see it. That way, you’ll have time to correct errors if they appear. It will also help you get an idea of your credit score so you can avoid applying if it’s such that you’re likely to be turned down — or the interest rate for which you’ll qualify won’t be advantageous.
Submitting credit applications can lower your score, so you want to make sure you get as much mileage out of each application as possible. Most importantly though, you want to make sure your credit score is still high enough to get you the most favorable interest rate possible. This is a huge part of what makes consolidation useful.
You can get copies of each of your three credit reports (one each from Equifax, Experian, and TransUnion) for free at AnnualCreditReport.com.
Review Your Finances
List all of your sources of monthly income on a spreadsheet and total them up to see exactly how much money you have coming in each month.
Keep track of every penny you spend over the course of a month to get a solid handle on your household expenses. This will help you find ways to pare your spending back to enable you to put as much of your income as possible toward paying off your debt.
Next, record all of your debts on a separate spreadsheet ordered from the lowest balance to the highest. Make note of the balance owed, the minimum monthly payment and the interest rate. Total the balances and the amount needed to service the debts each month.
Calculate the average interest rate you’re paying by totaling them and dividing by the number of debts you have. Let’s say you have five debts with rates of 15 percent, 19 percent, 21 percent, eight percent, and 12 percent.
You’d calculate your average as follows:
- 15 + 19 + 21 + 8 + 12 = 75
- 75 ÷ 5 = 15
Thus, your average interest rate is 15 percent.
When you’re done, you’ll have a clearer picture of your situation, from which you can determine whether a consolidation loan can do what you need it to do.
Determine Whether Consolidation Is the Right Move
According to the experts at Consolidation Plus, a debt consolidation loan works best if you can pay it off within five years or so and the interest rate you’ll get is lower than the average of what you’re paying on all of your debts right now.
You must also make sure you’re in a position to pay the loan off without any hiccups. If those parameters aren’t met, you could be setting yourself up for more trouble — rather than the relief you need.
Shop for the Loan
If everything pencils out, your next step is to find a lender with which to work.
You’ll want the lowest interest rate you can find, minimal fees, the shortest term you can manage comfortably and, most of all, a reputable lender.
You also want to make sure they’ll report you’re positive activities to credit bureaus to help boost your credit score. You’ll be asked to provide proof of your identity, income, and residency, so you’ll want to gather that documentation before you apply too.
Knowing what to do before applying for a consolidation loan will help you make sure you get the best possible deal, as well as ensure consolidation is really right for you.