An Introduction to Debt Consolidation Loans
Debt consolidation is a strategy for repairing your credit and getting your financial house in order. It is a way for people who have multiple debts owed to different creditors to get themselves on a workable payment schedule. The basic concept is that all of the exsiting debts are paid off with a single personal loan. The borrower then makes monthly payments on the personal loan and only has to be concerned with one interest rate for that loan.
The most important thing to work out when you are considering a debt consolidation loan is balancing the interest rates for the individual loans against the interest rate you are offered for the consolidation loan. For instance, it is likely that you have different interest rates for your car loan, mortgage, credit card balance and student loans. You may actually have to take on a higher interest rate for a debt consolidation loan than your current interest rate for your mortgage or car loan. However, the increased interest rate may still be beneficial to you if it is lower than your current interest rates for some of your debt.
What Determines the Interest Rate of Your Debt Consolidation Loan
If you are considering debt consolidation as an option, you should find out what your credit score is as soon as possible. This is vital information because the financial institution that offers you a debt consolidation loan will consider your credit score in determining the interest rate that you will pay. The other thing that will help to determine the interest rate you will be offered is the total amount of your debt that you need to consolidate.
In general, if you are going to apply for a debt consolidation loan with a higher balance, you will be offered a higher interest rate. If you have a poor credit rating, then you could even end up paying more in interest for a debt consolidation loan. For anyone who has a good credit rating, this is good news because it means there is a possibility you could get a loan with a reasonable interest rate.
The key to getting the most affordable interest rate for your debt consolidation loan is to check with more than one lender for interest rates. You are able to shop around online for different rates by offering the total amount of debt that you need to finance as well as your personal information for a soft credit check. You should not fret about your credit score being affected by soft inquiries from lenders if you apply for a loan estimate online. The only time that your credit score would actually be affected by a loan application is if you go through the process of officially filling out an application.
What if You Cannot Get a Low Interest Rate for a Debt Consolidation Loan
There are ways to improve your credit score in order to qualify for a lower interest rate loan. You can start by paying off any accounts that have been sent to a collections agency. It will take at least 30 days for your credit report to show any updates that an overdue account has been paid. You should check your credit score after you have taken steps to pay off your debt to make sure that the changes have been reflected in your file. When your score has improved, you can try again to apply for a debt consolidation loan.