If you want to get out of high-interest debt, consolidating your debt with a personal loan could be a smart choice. Debt consolidation loans could help you pay off your debt in full in one fell swoop. And since these loans simplify your payment schedule into one predictable payment each month, they could even help you manage your finances better. As a bonus, you’ll be able to make headway on the entire amount of your debt since payments will be applied to both the interest and principal each month.
Personal loans are available via banks or direct lenders. Both banks and direct lenders evaluate your creditworthiness before they lend to you, but direct lenders can use different criteria for evaluating your credit worthiness than banks do. Because of this, direct lenders may offer rates and terms that traditional banks don’t provide.
Not all lenders are the same, and your rate might vary between each lender. While you might think that you should choose the lender who offers you the lowest rate, there are many other factors you should consider before you take out a consolidation loan. Before signing loan papers, read these tips on securing the right loan for you.
- Find a Reputable Lender: Select a lender that you know by name or one with a good reputation. Be careful of loan aggregators or brokers as these companies are “middle men” who can share you information with anyone, including unscrupulous businesses. Remember when looking for a lender to only enter financial information on the website with a URL that starts with “https://” as the “s” stands for “secure.” In addition, many sites use a padlock symbol to denote security.
- Review the Fees: Many loans have an origination fee. For personal loans, this fee typically ranges from 1%–5% of the total amount borrowed. The specific fee you pay will depend on market conditions, your financial situation and your history of repaying debt. As the fee will be taken from the full amount prior to you receiving the funds, be sure to account for this when you make the initial amount request. As an example, if the origination fee is $500 and you need $10,000 to consolidate medical bills and credit card debt, then you may wish to add the amount of the origination fee to the loan request. Otherwise you’ll only receive $9,500 after the origination has been deducted. Similarly, if the loan doesn’t appear to have an origination fee, confirm that it doesn’t with the lender before signing papers. And always ask if there are additional fees the lender might assess.
- Decide about Loan Insurance: Some lending businesses may set you up with a loan and then try to sell insurance in case you miss a payment. They might offer:
- Unemployment Insurance: Loan payments will continue to be made if you become unemployed or are out of work for other eligible reasons.
- Life Insurance: Repayment of the loan will be taken care of in the event that you die prior to closing out the loan. Keep in mind that it is better to purchase a general life insurance policy that your family can use to cover any type of expense, not just a policy that covers a specific loan.
Loan insurance is expensive and often contains significant loopholes that protect the insurance company and not you.
- Research Interest Rates: Compare rates with several companies as lenders can use different calculations to determine the interest rate. Keep in mind that your credit score will heavily determine the rate you pay. Average interest rates on personal loans are 14%–18%, yet these rates can vary widely from as low as just over 4% annually for people with exceptional credit to 25% for people with poor credit. Try to work with a “live” person to request the rate so that you might qualify for without having to run a credit check; however, once you complete an application to receive a personal loan, the lender will assuredly check your credit.
- Ensure There Is Customer Service: Some online lenders may claim to offer excellent rates and terms, but be cautious if it’s impossible to speak with a “live” and knowledgeable representative. Today’s independent lenders use different criteria than a traditional bank or credit union to evaluate how likely a person is to repay a loan, yet they may not have the same type of staffing as a traditional lender. Reputable lending businesses have knowledgeable advisers you can speak with directly to answer questions and identify the best solution for you. These adviser consultations can be especially helpful if your credit score does not reflect their repayment capabilities.
- Know There Is a Credit Check: Avoid lenders who say they don’t care about your credit history. All reputable lending companies disclose that they will do a credit check as they need to know if you pay your bills in full and on time. This history is used as guidance that you’ll be able to repay what you borrow—and this credit check can have a short-term impact on your credit scores. Data from a single credit bureau may not be enough. The lender might review your credit history via Equifax, TransUnion and Experian.
- Be Wary of Tempting Offers: After you apply for a loan, you will see several options from lenders. One alternative might be a loan with a lower payment and longer term. Be clear that this means the total cost of the loan will be higher! If you can afford to pay more each month, then take a shorter-term loan. Also, only borrow what you need and what you can repay promptly. This way you can avoid getting into further debt issues. If you are uncertain for how much to borrow, carefully read the fine print and ask a financial adviser for a second opinion.
- Avoid Financial Scams: Ensure that the lender is registered to do business in your state. Also, there should be no need to pay up front to get a loan—avoid lenders who ask for a prepaid debit card for payment of insurance or fees as well as stating they will use the card as collateral. These are not reputable lenders! Although there may be an application fee or administrative costs, these are deducted from the loan and not something you pay beforehand.
After you receive your loan, be sure to use the funds the way you intended. If you are using a personal loan for debt consolidation, some companies will assist you with this goal by sending the funds directly to creditors.
Finally, if you don’t qualify for a low interest rate on a personal loan, then it might not make sense to get a debt consolidation loan. If this is the case or you feel overwhelmed with organizing debt consolidation plan, consider enrolling in a debt relief program like the one offered by Freedom Debt Relief. Such programs can help with debt negotiation and simplifying your monthly payment. Enrollment can help to reduce financial stress as you know you’ll be on a path toward the solution. Visit Freedom Debt Relief to learn more about how a debt relief program works and can help get you on the road to financial freedom.