Deciding whether or not to take out a loan to pay off your other debt — let alone which loan and for how long — is a decision to be considered carefully.
After all, it will affect your credit score and the way you pay bills for years. Taking the time up front to understand your options and hone realistic expectations will help you make the most of the process. Jumping into the first loan you find without all the information you need, on the other hand, can lead to more financial troubles down the line.
Here’s some general debt consolidation loan advice to keep in mind as you explore this decision.
Shop Around for Different Loan Offers
There are a variety of lenders offering a variety of loan products both in person and online nowadays. This means it’s smart to comparison-shop just like you would if you were buying a car, a couch or a hotel room.
According to The Motley Fool offers the following tips for effectively comparing personal loans:
- Gather quotes from three different lenders at minimum — like banks, online companies and credit unions. The more quotes you get, the higher the chance you’ll choose the best offer for you.
- When comparing loan options, apply for pre-approval (soft inquiry) rather than applying for financing (hard inquiry) straight away. This will help preserve your credit score, which can take a hit with each hard inquiry.
- Look at the monthly payment, interest rate and loan term when comparing. A loan that appears less expensive based on monthly payment alone might actually be costlier if you have to pay for a longer period of time.
- Make a decision based on the total cost, including fees and annual percentage rate (APR).
- Read the terms and conditions on each product, too.
Use a Debt Consolidation Calculator
Comparing multiple aspects of multiple U.S.A. debt consolidation loans means juggling a lot of numbers at once. Thankfully, debt consolidation calculators exist to crunch the numbers for us — all you need to do is input all the terms of any given loan.
What types of information will you need to know to take advantage of an online calculator?
- The amount of the loan you’d need to cover your debts
- The interest rate you’re able to qualify for based on credit
- The loan’s term
- Up-front costs charged by the lender
- Monthly payment
Make a Plan to Avoid Accumulating More Debt
Taking on new debt to pay off old debt can indeed make your life simpler and save you money. However, amassing more debt so you have new debt and newer debt counteracts these benefits, leaving you with even more debt than when you started. Further, missing payments on your consolidation loan can have dire consequences for your credit score and your likelihood of securing another one.
This is why it’s so important to have a plan to curb your spending — and a budget that can support loan payments for as long as it takes to pay off every installment. Consider tracking your spending using a mobile app — if you aren’t already, as this will help you better understand where your hard-earned money goes. You may want to forego using credit, switching to debit or cash. At the very least, charge only what you can pay off at the end of the month. Distinguish between wants and needs, and give yourself a “cooling-off period” before buying any non-essentials.
This debt consolidation loan advice should help you explore your options so you can ultimately choose the best solution for you.