A debt reduction loan is a personal loan that you can use to pay down high-interest Debt, typically credit cards. Consolidating debts helps you use only one loan to pay down one or two credit card accounts and simplifies your payment strategy. And based on how much Debt you have and the terms of the loan, it may also save you money and time.
To determine if a debt consolidation loan is right for you, it is necessary to understand your particular financial condition and your financial priorities. Here’s what you need to remember.
When Debt Consolidation May Be a Good Idea?
You can use a personal loan to buy whatever you want. But if you’re dreaming of using it as a debt consolidation loan, the following might be the occasions when it’s worth considering:
You Already Got An Excellent Credit Score
Personal loans are made available to borrowers across the financial spectrum. But if you want better conditions and a low interest rate, you would usually need at least a better credit score, beginning with the FICO Score of 670.
You Have Debt Accumulating to High Interest
According to Experian results, the average personal loan interest rate is 9.5 percent. On the other hand, a credit card interest rate is about 16%. If you can apply for a cheaper rate than what you are paying now, the restructuring of your loans will help you to save more money on those interest payments.
You Have A Repayment Plan
One of the drawbacks of credit cards is that, as a form of revolving
credit, it encourages you to spend and pay off money frequently—and as a result, there is no fixed repayment schedule.
If you keep keeping your card and pay just the minimal amount owed per month, you could live in Debt indefinitely. On the other hand, personal loans have a fixed maturity period, but they can be an outstanding option if you are encouraged to have a plan and adhere to it.
When Can Debt Consolidation Not Work For You?
While there are some apparent advantages of using a debt reduction loan to pay down credit card debt, there are some cases where it may not be the best candidate:
I don’t remember you planning to change your spending habits
A restructuring loan can be enticing because it frees up the balance available on your credit card. But if you pass the balance, then run up some of the cards you just paid off, you might end up in a much worse financial position. It is better to resolve possible spending problems before deciding to commit to a loan.
You’ve got fair or bad credit
Again, it’s easy to get a low score on a personal loan. Yet you are likely to end up with a higher interest rate, increasing the expenses and eventually making monthly payments unfeasible.
How Do I Get a Debt Consolidation Loan?
Many lenders encourage you to get pre-qualified for a loan before you send an official application. Usually, this method involves a soft credit check that won’t hurt your credit history. If the lender doesn’t give pre-qualification and many others on the list do so, it might be better to skip the one that doesn’t.
When you have pledged to the loan, apply your application. This typically allows you to have some contact documents, job and income information, and how much you’re planning to borrow.
What if your application for a loan is denied?
Some loans get rejected; there may be many explanations for this, and be sure to check your mail for the adverse action notice. You will now be eligible for a free copy of your credit report, which will help you find aspects of your credit history that you can change.
Make sure to review your credit report and credit score to see where you are compliant and what steps you should take. If your financial rating is in reasonably good condition, consider reducing your loan or apply for another lender that does not have such strict credit conditions.
How Do Debt Consolidation Loans Influence My Credit Score?
A debt restructuring loan will affect your credit score in a few ways, both positive and negative. Here’s how:
if you make your loan repayments every month, it will boost your credit rating with time. However, if you miss a payout of 30 days or more, the score might be hit big.
Average Account Age
When you open a new credit account, it decreases the average age of your accounts, which changes the length of your credit history. It’s not as relevant as your utilization rate or payment history, but it can also affect you.
Hard Credit Inquiry
Each time you apply for a loan, the provider can take a hard look at your credit history. According to FICO, this could lower the ranking by a few points. When you’re thinking about debt restructuring, be sure to consider these considerations and how the process could impact your credit profile now and in the future.
Go Debt Free Today
Encompass Recovery Group will intervene on your behalf and negotiate lower interest rates so that you can keep up with your payment. Our financial advisors will also assist you in developing a new budgeting strategy that will enable you to stop incurring additional debts.
Encompass Recovery Group has partnered with thousands of clients to help them plan their financial futures, and we will do the same for you. We recognize that your case differs from that of our previous and existing clients, so we provide you with options that suit your particular financial situation.