Many people are choosing to consolidate their debts for their own benefit, though loan consolidation is not for everyone. You need to understand what loan consolidation requires before you decide to take up a plan with a favorable organization. The steps below will offer you a complete guide on the steps you should take in your plan to consolidate your loans, and options that you can consider.
- Do you qualify for debt consolidation?
Debt consolidation can be useful to those who are in bad debt as well as those who are not in bad debt, since this process ensures a simpler process of debt repayments. Debt consolidation can save you if you are becoming bankrupt. Your consolidation agency can negotiate with your lender to reduce your monthly payments to what you can manage.
- Know your credit score
Your credit history is the number one factor that will determine how you will get a loan. You will get a high interest loan if you have a low credit score and a low interest loan if your credit score rates are high.
- Is debt consolidation too expensive for you?
Before you get a loan, always calculate the total cost of the whole life of the loan. This includes the interest rates and other costs like origination fee, taxes and any other recurring costs. Do not be fooled by the low monthly costs that a debt consolidation company can offer you. The lower the monthly costs, the longer time it will take you to repay the loan and the more expensive it will be.
- Negotiate a low interest loan
There are consumers who were given a better deal than what their lenders had initially offered through negotiating. Interest rates increase the overall cost of a loan significantly. If you are considering collaborating with a credit-counseling agency, select an agency that has a good track record of securing commendable arrangements for their lenders.
- Do your research well
You will get a good deal if you choose from several options. Set aside time to get what different companies offer from top debt consolidation reviews. You do not have to make physical visits to all companies. You can call their offices or learn what they offer from their website. For instance, you can select three or four best options from your research and then make physical visits to the company offices you have shortlisted.
- Get guidance from a credit-counseling agency
It is a good idea to do your own research before you contact a credit-counseling agency, so that you have a conversation from an informed perspective. Credit counseling agencies are great at guiding consumers through financial resources and assistance to become debt free.
However, there is a great downside to these agencies since it will limit your credit score. Having a credit-counseling agency in your list of creditors communicates to banks and credit unions that you had a problem in debt management. On the other hand, you can still improve your credit score if you make a viable arrangement with the agency towards making you more committed in your monthly payments in clearing your debt, which can still improve your credit score.
- Know the different types of loan and choose the best
There are two types of loans:
- Unsecured loans –Loans that do not have collateral
- Secured loans – Loans that have collateral, which is commonly a house or a car
Secured loans have a lower interest rate because of the collateral. However, you should avoid getting secured loans since you will have a huge price to pay if you default on payments. It is therefore much safer to get an unsecured loan. You can easily get an unsecured loan with low interest if you have a good credit score. If not, it will be better for you to pay an unsecured loan over a longer period with manageable monthly costs.
- Understand what you are signing up for!
When you choose the best loan arrangement, read the contract very carefully before you put your signature. You do not have to sign the contract immediately it is given to you. Take your time with it. It would be great if you consult a credit counselor to avoid surprises in the future.
- Impact of closing your accounts
Even though your financial agency may require to close your other accounts, do not close all your credit accounts at once. Closing all your accounts at the same time will have a negative impact on your credit score, since your credit utilization rate will be undermined. In addition, the life span of your credit accounts affects your credit score. Your long history of using your credit account will no longer appear in the records of your active accounts. Instead, balance out the risk of your credit score by closing credit accounts that you had already defaulted, and keep those that have a better history.
- Track your spending!
You will find that you spend a lot in festivities like during Christmas. Begin a culture of saving receipts. Going through your receipts after some time will help you see the costs that you would have averted, which can help you make better decisions when purchasing items next time. After tracking your spending, make a budget for every season, which you should strictly adhere to.
- You should pay more than the minimum monthly cost
Although it can be comfortable for you to pay the minimum charge every month, it will cost you highly in the end. Minimum payments translate to longer repayment periods, which mean higher interest rates. Be committed to clear your debt as fast as you can. You can even take up a second job to ensure you clear your debt as soon as possible with meaningful monthly payments.
Conclusion
Improving your spending habits is a major contributor to whether you will succeed in being debt-free or not. A life changing way to work on your spending habits is to differentiate between your needs and your wants. Prioritize your needs, which can cause your death if they are not met, and be disciplined to choose your wants.