Consolidation Loans to Manage Your Credit Card Debt
Personal loans are often used for just about any purpose, but a common (and often wise) use for them is just paying off high-interest, long-term debt, where that debt is unsecured, hence the name. A personal loan, sometimes referred to as a signature loan, is actually a form of unsecured borrowing: unlike conventional loans, they do not require the borrower to put up any collateral against the money that he or she borrows. However, if the borrower fails to pay the loan on time, the lender has every right to seize and sell any property that is involved in the debt agreement. This is why most personal loans end up in debt consolidation plans.
Most consolidation loans are provided by lenders with lower interest rates than the loans they provide to individual customers. But the lenders with lower interest rates are not necessarily better at managing debt. The fees that they charge for the services they offer may actually increase the amount of money the borrower needs to pay in order to get out of debt. And the lenders who charge higher fees are not necessarily less capable of managing the money entrusted to them. Here are some ways to compare the fees charged by different lenders for the services provided.
The first thing to compare is the interest rate that the consolidation loan companies offer. Lenders all set their own interest rate for the loans they offer, so there is no way to compare how much the lenders charge for each. Instead, compare the annual percentage rate (APR) of the loans offered by each lender. The APR is the standard fee that lenders calculate for the loans they arrange. The better the APR, the lower the monthly payments the borrowers will have to make.
Once you know the APR, take a look at the other charges that will be charged to you for your consolidation loans. You’ll likely see that most lenders charge the same or similar amounts for paperwork and application processing as well as for the loan amounts they arrange. The only difference between the charges is the lender’s payment structure and the amount of money you’re going to pay the lender in order to settle your loans.
Another factor that will affect how much money you’ll need to repay each month is the length of the repayment term. Debt consolidation loans will come with varying terms of repayment. Some can be ten years in duration while others are only two. Most borrowers choose the terms that best meet their needs, but you should take a long hard look at what the terms of repayment for your individual debts offer. A longer repayment term gives you more time to arrange new, lower-cost deals on your existing debts.
Before you commit to any debt consolidation loans, it’s important that you have a solid plan for getting out of debt. If you’ve done your research and intend to use a personal loan to manage your existing debts, you’ll want to consider what steps would be necessary to get yourself out of debt. Will you have to sell your home? Or maybe you could take out a short-term loan, either for a few months or a few years, to cover expenses while you work toward settling your debts?
Your credit score is an important part of your financial picture. If you have good credit, you may not even need a consolidation loan to consolidate all your debts because your credit utilization ratio will already have been greatly improved. However, if you have poor credit, you may need to work on your credit score before you apply for any new financing.
You’ll want to carefully review the rates offered by each lender that offers you personal loans to consolidate your credit card debt. Each lender works with different interest rates, so you’ll want to shop around until you find the best interest rate. This interest rate will usually be a little higher than your current rates, since unsecured lenders are often able to charge a higher interest rate in order to make up for the higher risk of providing you the financing that you’re asking for. However, the payment schedule is essential to your success. If you want to avoid late fees, missed payments, and higher interest rates when you decide to refinance after your consolidation, make sure that you’re sticking to your budget and making your payments on time.