5 steps to consolidate a debt with a personal loan

So you’ve decided that consolidation is your best bet to control your debt. Well, you have to know that consolidating a debt through a personal loan means that your payments will be simplified and you will reduce your debt more quickly.

In this article we have collected five steps to consolidate a debt with a personal loan, starting with your credit check and ending with the loan closing. Follow us on this walk through the credit consolidation process with a personal loan.

1. Credit check

Bad credit score (300 to 629 on the FICO scale) doesn’t mean you’re automatically disqualified for all loans, but consumers with good to excellent credit scores (690 to 850) are more likely to have their applications approved, and not just that , but at the best rates.

Consequently, the new debt consolidation loan should ideally have an interest rate lower than the combined interest rate of your current debts. Why? Well, because a lower rate reduces the total cost of your debt and shortens the payment period.

However, if your credit score isn’t at a level that will allow you to get a lower rate, take the time to build it up. To achieve this, do the following:

Catch up on late payments

Late payments are reported to credit bureaus 30 days past due and they can lower your score by 100 points or more. If you’re within the 30-day deadline, you still have time to make payments.

Check your credit report for errors

Errors on your credit report, such as payments applied to the wrong debts or accounts incorrectly marked as closed, they are not unusual and they can hurt your score too. Therefore, it is essential that you review your credit reports, and if you find errors, contact the appropriate bureaus to dispute them.

pay off small debts

The debts you have represent 30% of your credit score, so we recommend that you pay off what you can before consolidating them. For example, it’s a good idea to start with high-interest credit cards. Doing this also improves your debt-to-income ratio, which can help you get a lower rate on the consolidation loan.

2. Make a list of your debts and payments

The next step, but no less important, is to make a list of the debts you want to consolidate. This can include credit cards, store cards, payday loans, and other high-interest debt.. In this sense, you will want the income of your loan to cover the total amount of your debts.

Once you’ve done this, add up the amount you pay each month toward your debts, and review your budget to see if there are any spending adjustments you need to make to continue making payments. The new loan should have a lower rate and a monthly payment that fits your budget, so you should build a payment plan that takes this into account.

3. Compare the available options

It’s time to start looking for a personal loan. Online lenders, credit unions, and banks offer personal loans for debt consolidation.

online lenders They offer borrowers all ranges of credit, although loans can be expensive for those with bad credit. Most allow you to pre-qualify so you can compare personalized rates and terms, without affecting your credit score.

bank loans they work best for those with good credit, and customers with an existing banking relationship may qualify for an interest rate discount.

The credit unions They are non-profit organizations that can offer lower rates to borrowers with bad credit. But before applying for a loan, you need to become a client of the institution, and many credit union loans require a hard application for credit, which can temporarily hurt your score.

On the other hand, look for lenders that offer direct payment to creditors, which simplifies the consolidation process. How does this work? Well, after you get the loan, the lender pays your creditors directly at no additional cost.

Other features to consider include: reporting payments to credit bureaus (on-time payments can help your credit score); flexible payment options; and financial support.

4. Apply for the loan

To proceed with the loan process, lenders will ask for several documents, including proof of identity, proof of address, and income verification.

Make sure you read and understand the fine print on the loan before you sign it, including extra fees, prepayment penalties, and whether payments are reported to credit bureaus.

If you don’t meet the lender’s requirements, consider adding a good credit cosigner to your application. This can help you get a loan that you wouldn’t qualify for on your own.

5. Close the deal and make the payments

Once you have been approved for the loan, the process is almost complete.

As we have explained before, if the lender offers direct payment, they will disburse the proceeds of the loan to your creditors, thus paying off your old debts. Next, you’ll need to check your accounts for a zero balance, or contact each creditor to make sure the accounts are paid.

If the lender does not pay your creditors directly, then you must pay each debt with the money they deposit in your bank account.. Do it right away to avoid additional interest on your old debts, and to remove the temptation to spend the loan money on something else.

Finally, within 30 days, make your first payment for your new consolidation loan.

What are the pros and cons of consolidating debt with a personal loan?

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There are several pros and cons to using a personal loan to consolidate debt, so it’s important to understand them before deciding if it’s the best option for your situation.

Advantages of consolidating a debt with a personal loan

  • You only make one payment each month to a single lender, so managing your finances is more manageable and simple.
  • You may be able to reduce the amount of interest you pay on your debt. Also, rates are more competitive for loans over $7,500.
  • Reducing the amount of interest will help you pay your debts faster.
  • Monthly payments on personal loans are fixed, which makes it easy to manage your budget.
  • You have the option to choose how long you need to pay off the loan, usually up to five years.
  • Pay on time every month can help you improve your credit score.

Disadvantages of consolidating debt with a personal loan

  • Not all lenders will let you use a personal loan to consolidate debt.so check that this is the case before you start.
  • The most competitive personal loan rates are only offered to those with good credit scores, so if yours doesn’t measure up, they may offer you higher rates.
  • Depending on the interest rate they offer you, monthly payments could end up being higher than your original debts.
  • Payments are not flexible, so any delay could hurt your credit score.
  • The longer the term of the loan, the more you will pay in interest.
  • Note that you may have to pay a prepayment fee of one or more of your existing debts if you offset them with a new consolidation personal loan.

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