A Basic Introduction to Debt Consolidation
If you are looking for an effective way to get a handle on your personal debt, debt consolidation is a popular option for finding a streamlined approach to paying down loans. In order to consolidate all of the debt that you owe to different lenders, you take out an additional personal loan from a bank in the total amount of your debt. You will pay an interest rate on the personal loan that is typically lower than the total interest you would be paying for each individual loan.
If you think that you are a good candidate for debt consolidation, one of the first things you will want to know is your current credit score. This is the single biggest factor in determining how much you could pay for your interest rate, which is crucial for determining how long it will ultimately take you to pay off your total debt amount.
What to Expect for Typical Debt Consolidation Loan Rates
If you are considering a personal loan to consolidate your debt, you will want to invest some time in shopping around for the best interest rate that you can get. This is crucial because rate offers can change daily and vary widely across different financial institutions. Your rate may also depend on other facts, such as the total amount of debt you seek to refinance and the length of your proposed loan term.
If you have an excellent credit score, you might be able to find a personal loan option in the amount of $10,000 for as low as 4.29 percent. However, if you have a low credit score, you could end up paying as much as 25 percent for a personal bank loan for the same amount. In addition to that concern, you may not even end up getting approved with a credit score that is well below average.
There is a common misconception that you can damage your credit score by applying for a personal loan and having your credit score check. This is not exactly true if you apply for a personal loan online. In that case, you would only have a soft check of your credit score because the lender would only be providing you with an estimate of what you could qualify for. If you actually decide to go through with the personal loan, then you would have your exact credit score pulled, which may be reflected as a slight ding in your credit score. However, you can offset that decline by decreasing your total debt obligation and making monthly payments consistently on time.
Other Factors for a Debt Consolidation Loan
While your interest rate is certainly important, you should also ask about any origination points charged by the lender in offering your loan. This could scale back any gains you get from a lower interest rate by actually charging more for your overall loan.