UPDATED: May 12, 2022
Does it ever seem like you have too many bills to pay every month? Student loans, car payment, credit card, etc. Each of these bills has a different due date throughout the month, and each requires a separate payment. Worse, some of the consumer loans have very high interest rates. Keeping track of all that debt can seem overwhelming. Luckily, there are options to simplify your monthly bills by consolidating debt with a personal loan.
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Things to Consider
Getting any kind of loan requires careful consideration. Nobody wants to be so deep in debt that they feel like their financial life is out of control. The whole point of getting a personal loan to consolidate debt is to gain control. Not free up their cards for additional spending.
Ask yourself these questions before you begin the process of getting a personal loan.
Can I Save Money on Interest?
One way to answer this question is by looking at your credit card rates and the length of time needed to pay them off. On average, someone with good credit pays around 20% interest, while people with excellent credit pays less.
On the other hand, an unsecured personal loan, depending on the lender and your credit, can range between 5.9% and 36%.
In addition, you may pay other fees to the personal loan company. These loans have fixed terms, so you want to ensure that the interest savings is good enough to save you money.
Will This Get Me into More Debt?
Remember, if you are using the money to pay off credit cards, those accounts will remain open. This means that you can run them up again, increasing your debt.
If you can resist the temptation to overspend, then consolidating debt with a personal loan may be a solid financial move. Creating a budget can help ensure that your reliance on credit cards doesn’t return with a vengeance, and that the cards are used as a convenience. The last thing you want to do is make your situation worse.
Plan to Pay it Back?
Taking out any loan obligates you to pay it back, and personal consolidation loans are no exception. With this type of loan, you’ll pay a fixed amount of money every month to the loan company, just like you would with a mortgage or auto loan.
This reduces your flexibility, because you can’t just pay the minimum if there’s a cash crunch. Make sure that the fixed payment is affordable, so you won’t be tempted to overuse your credit cards.
If you have answered “yes” to all of these questions, then you can take steps to get a personal loan. However, don’t be tempted to take just any offer: know what to expect, and make sure that you stick with your payment budget.
Getting Ready to Apply
Unlike with credit cards, personal loans are a bit more complicated to obtain. As we said above, personal loans have fixed payment schedules, just like the car loan.
While a credit card company only cares if you can make the minimum payment, the loan company is looking at your ability to pay the fixed amount monthly.
The pricing structures of personal loans can be a bit more complicated than they are for credit cards, and they can’t be adjusted once the loan is granted. Prepayment penalties and origination fees are all variables the borrower must consider.
Check your Credit
Any time you are considering a new loan, it’s important to check your credit report. Many reports contain errors, such as wrong accounts or faulty payment history. Unfortunately, if anything is incorrect on your credit report, it can reduce your ability to get the loan you need. Having missed payments damages your credit score and can lead to higher rates or fees.
Extra accounts might point to identity theft, as well. For these reasons, you need to ensure your credit report is accurate before applying for any loan. It may make sense to increase your credit score before applying.
Fortunately, if you find errors there are ways to get them fixed. Your most basic method of “fixing” a credit report is through disputes. By law, credit reporting agencies are required to verify entries on your report at your request.
First, identify the error, making sure that the problem isn’t something you’re forgetting. If you can’t explain the discrepancy, send a formal dispute letter to the credit reporting agency and ask them to verify the information. Alternatively, send a letter to the company making the report and dispute the debt.
In both cases, the company or agency is required by law to investigate your claim and send a response. If errors are confirmed, the record must be corrected.
Know What you Owe
This one might seem like a no-brainer, but it’s important to know the total of your balances. When applying for any loan, the company will ask you how much money you need to borrow. Your answer should include that balance total, but keep in mind that if there are origination fees the company might take that out of your loan balance. It’s critical to ensure that your personal will is enough to pay everything off.
Prove Your Income
While it is easy to state your earnings if you have one job and no other income sources, other people have more complicated situations. For instance, you might have an online side hustle or money coming in from investments. Child support and alimony are other types of money that can be included in your loan application.
Loan companies often ask for documentation, so make sure you have it ready. Evidence can include pay stubs, child support orders, and brokerage statements, among other things.
Finding a Personal Loan
Once you have a thorough grasp of your financial picture, it is time to look for a personal loan. As with many major financial decisions, it often pays to shop around for good deals. You wouldn’t buy the first car you see, would you? Know what to expect before filling out an application online.
While some personal loan providers send out pre-qualification offers, most personal loan providers will evaluate your credit to see what terms you are eligible for. You can do this with one lender at a time, or go to a loan site that lets you get multiple pre-qualifications with one simple form. Once the form has been filled in, you should get answers from various lenders, usually within a few hours.
Once you get the offers, evaluate which ones have the best overall terms. Maybe there is a difference in the estimated interest rate, or one company wants to charge a higher loan origination fee. Keep in mind that a higher fee could be made up for if the interest rate is significantly lower, but you may need to take out a slightly larger loan.
Another differential could be the term of the loan, monthly payment amount, or prepayment penalties. After evaluating the loan pre-qualification offers, decide which one will best suit your needs.
Apply for the Loan
It’s time to apply for the loan. Actual application details vary by company, but you will fill out a formal application for credit. At this point your credit will be checked again, and you will be asked for documentation of your income.
Generally, the pre-qualification will tell you what documents are expected. Sometimes you have to prove what you’re paying for rent, because the rent amount doesn’t usually show on a credit report. Even at this point, it’s OK to shop around because you never know what changes might come up.
Close on the loan
Your last step is to close on the loan. Usually the funds are directly deposited in your bank account. Other times, the lender might give you a rate discount for paying off your existing debt directly.
Either way, congratulations. Now that you have consolidated your debt with a personal loan, you’ve made a massive step towards reducing high interest debt and simplifying your life. Just make sure you don't go out on a spending spree with your zero balance credit cards.