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Before shopping for a debt consolidation loan and taking the first steps to pay down built-up debt, you should first understand what your cost will be. You may be in need of a debt consolidation loan for reasons outside your control or due to spending beyond your budget.
Either way, it is smart to be in control so you understand what your monthly costs will be. This way you can avoid any future headaches.
How your monthly payment will look with a debt consolidation loan
If you have multiple types of debt that you need to pay down, each creditor will carry differing due dates and amounts on it. This is why the process of debt consolidation is a good financial move, all your debt gets rolled into one which means you only have one monthly payment.
With debt consolidation, you will know the exact amount you need to pay each month as it will be set when you sign off on your loan rather than juggling a few different payments all at once. Consider the following potential monthly payments of individuals with varying amounts of debt to consolidate and fair credit (640-699).
|Type of debt
|Estimated monthly payment
As displayed above, your total monthly cost for all three credit cards would average $214 per month and would take a minimum of 121 months to pay off. Due to the variable nature of credit cards, the rates can also go up and down based on market conditions.
A debt consolidation loan, on the other hand, will be protected from potential fluctuations as personal loans offer a fixed interest rate — meaning more savings in the future.
By consolidating these accounts with a debt consolidation loan at an 11.05 percent rate — the average APR for personal loans as of June 2023 — your payment will drop down to $188 a month. That automatically translates into monthly savings of $26 and $925 or more saved on interest payments over the course of the three-year repayment term.
Is debt consolidation right for you?
Taking out a debt consolidation loan is right for those who have more than one high-interest loan and are looking to roll that debt all into one. Though, this process is not best for every sort of borrower.
The main measure of success here comes down to the interest rate you can feasibly receive. Debt consolidation is a good idea if you have fair credit or better because you will be able to secure a competitive rate and not be left with more financial headaches in the future. If you have poor credit and cannot secure a good rate, it is best to consider other options.
Alternatives to debt consolidation for bad credit borrowers
If your credit score doesn’t make the cut and you would be left with sky-high rates, consider some alternatives to consolidate your debt.
- Do it yourself approach. If you would prefer to handle your financial plan on your own, consider updating your budget, renegotiating your terms of debt or asking for a due-date adjustment.
- Debt management plan (DMP). With this route, you will make one monthly lump-sum payment to a credit counseling agency that will cover multiple bills. This is a good option for those that have $10,000 or more in unsecured debt.
- Home equity. If you are a homeowner taking out a home equity loan to consolidate your debt can help you to secure a lower rate even with poor credit.
Keep in mind: When you begin the debt consolidation process, you will likely see an initial drop in your credit score, but that number can quickly recover as long as you make on-time payments.
How to apply for debt consolidation
If you decide debt consolidation is right for you and your financial needs, take the following steps to move towards a debt-free life.
- Organize information on debts. Before deciding on the right debt consolidation option for you, you must understand how much debt you have. Organize information like the current amount owed, payoff amount, original principal balance, APR, creditor contact and prepayment penalties.
- Research. There are many sources for finding debt consolidation. Consider the benefits and drawbacks of working with a bank, online lender or credit union for this process.
- Apply for prequalification. Not all lenders offer the ability to prequalify. But as someone who may be tight on finances, having a more solid idea of expected cost can relieve stress and help when comparing lenders.
- Hit apply. At this point, you will have already shared basic Infomation on your debt so now prepare to share some personal info on your identity, income and documentation of current debt.
- Receive funding. There are two ways your debt payoff will be handled. Either your lender will pay your debts directly to the creditors or you will request the specific payoff amount and pay off the credits yourself. It is critical to know which route you are taking before the funding process begins.
- Credit report
- Proof of income
- Creditor contacts
- Proof of identity
- Documentation of current debt
The bottom line
The process of debt consolidation can help relieve your debt in an effective way and leave you with a better financial standing. But as someone who may have had financial trouble in the past, it is of utmost importance to calculate the amount of money you can afford to spend each month. When comparing debt consolidation options, pay close attention to available rates and potential fees enforced by the company.