Debt Consolidation is a process that can combine several debts into one single debt. Debt consolidation makes it simple to manage your debts by taking them into one account. You can easily pay your loans with one single monthly payment by using the debt consolidation technique.
Figure out what you owe
The most important thing in debt consolidation is to identify the types of loans you have, the amount of them, and the interest rates.
Don’t forget to add up all of your debt into the debt consolidation plan. The old loans you have taken some time ago should be included in the debt consolidation plan.
Low financial literacy is the main reason why people are stuck in the sinking sand of debt.
Don’t even worry if you have low financial literacy, you can seek guidance from the experts via counseling. Counseling is essential before going for a consolidation, which is your best option to manage your debts easily.
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Know how much you can borrow
When you are going to consolidate your debts, you have to know the limits you can go.
In consolidation, a bank or other institute grants you a loan to pay off your old debts, and you can repay that single loan with monthly payments. In the consolidation process, you will receive this new loan with a lower interest rate than the older ones. To get eligible for a consolidation loan, there is a minimum credit score you have to maintain. It is normally applied for consolidation loans if your credit score is good enough to get approved for credit cards and other loans. It is advisable to go for a consolidation loan if you have a moderate amount of loans, not enormous, not small. If it is enormous it is advised to go for a debt settlement loan option.
You can apply for a loan for debts less than 50 percent of your annual income. The amount you can borrow highly depends on your annual income. On the other hand, the interest rate for your consolidation rate highly depends on your credit score. You can get a free copy of your credit report from Transunion, and Experian.
A score higher than 690, is known as a good credit score to get qualified for a consolidation loan.
Ways to consolidate
There are different types of consolidation loans. They are mainly divided into two categories, secured loans, and unsecured loans. Secured loans are backed up by your property, like your house or car. Unsecured loans don’t have a property to back them up. They give you the loan upon your promise to repay the debt. There are many types of consolidation loans you can get. They are bank/ credit Union Personal loans, peer lending, credit card balance transfers, and student loan consolidation.
Ways to pay off debts
After getting eligible for a consolidation loan you can get lower monthly payments and lower interest rates.
Pay off is different from one loan type to another. For example, if you get a home equity loan as a consolidation loan, you can have tiny monthly payments over 20 years with an interest rate of 4%. If you are not comfortable with the longer time period or with the higher interest rate, you can rearrange it for 5 years with a minimum interest rate.
When you use a consolidation loan type like credit card balance transfer, you can have a balance transfer credit card with a very low APR ( you might get 0% APR, if you find a good offer) for a 1-2 year introductory period.
Balance transfer credit cards charge some money to transfer credits. 3% is known as a reasonable transfer rate. Some transfer credit cards can charge up to 5%, which is not viable. If you are lucky enough, you can find a balance transfer credit card with 0% APR and with a 0$ transfer fee.
But, be careful, if you have a balance after the introductory period, interest rates can skyrocket. Therefore, it is advisable to pay off all the credits within the introductory period. In Credit Union Personal loans, your credit score will affect the size and the term of the loan, and also the interest rate.
Peer lenders work as a broker between borrowers and individual investors. Borrowers can ask for a loan of up to $25,000 and a payback period for 3-5 years.
In student loan consolidation, you can have interest rate discounts to repay your loan with a lesser burden.