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What to Consider When Looking for a Debt Consolidation Loan

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Debt Consolidation Helps Save Money

Debt consolidation loans can be an effective tool for those who are looking to reduce monthly payments on a variety of payments such as credit card balances or personal loans. In many cases, consolidation loans come with lower interest rates, which means that more of each payment is going toward the principal balance owed.

Typically, consolidation loans are made using a home or car as collateral. However, they can also be made by transferring existing credit card or other balances to another credit card that offers 0 percent interest.

As there are a variety of consolidation loan products available, it is important that an individual understands how to find the one that has the best terms. Generally, you want to talk to multiple lenders before settling on one to work with. In some cases, you may be able to go online to compare multiple lenders at once. This can save time and allow you to feel confident that you are working with the lender that best meets your needs.


What Type of Collateral Are You Using?

To determine if a given loan product best meets your needs, consider the type of collateral that will be used to secure the loan. If you own a home, it may be best to look into a home equity loan or line of credit. If you don't have a home or other assets, a title loan could be used as collateral to help consolidate payday or other short-term loan balances. If you don't want to use collateral at all, an unsecured personal loan or a credit card balance transfer may best suit your needs.

What Type of Lender Will You Work With

The type of lender that you choose to work with will play a role in the loan terms that you receive. In many cases, credit unions and local banks will offer lower interest rates on personal loans or similar products. This is because they have lower operating costs compared to large national banks. At the same time, they want to develop relationships with members of the community. Online lenders may also offer lower interest rates because they have almost no overhead, and it may be possible to get a loan decision in a matter of hours as opposed to a matter of days.

Your Credit Score Matters

Those who have a higher credit score tend to get the best interest rates. They are also more likely to qualify for unsecured loans without the need for a cosigner or other special conditions. If you have a credit score of higher than 640, you can generally get whatever loan you want. However, if your score is less than 640, it may be a good idea to work on getting rid of any black marks that might be holding you back. For example, you could make arrangements to make up for missed payments or pay down some of your existing debt balances.

Why Following This Process Matters

It is critical to know what type of collateral that you will use to secure a loan because it could be repossessed. By missing a single payment, the lender could take ownership of your home, car or other property and sell it at auction. In the event that there is a balance left over after the collateral has been liquidated, you could be responsible for paying it.

Working with the right lender is important because you want to be able to talk to someone if you have questions about the loan. Generally, local lenders will provide you with more leeway in the event that you can't make a payment or need to make a payment late.

Finally, applying for a loan with a good credit score means paying less in interest during the repayment period. This can make it easier to pay off in a timely manner, which can help you gain more control over your finances. Furthermore, by making debt consolidation loan payments on time each month, you can further improve your credit score.

Comments

Cody Hodge (author) from Rochester, NY on August 29, 2018:

Thanks Eric!

Eric Dierker from Spring Valley, CA. U.S.A. on August 29, 2018:

Very well done. We need to see some action here. Thanks for the info.