Feeling overwhelmed by debt is not necessary. You have options. Debt consolidation can help you feel in control again. Before you jump at the first offer given to you, learn your options. Here we will help you learn how to compare debt consolidation lenders. Most are honest, but some may not come through with what they promise. Learn what to look for below.
Understanding Debt Consolidation
First, it is important to understand how debt consolidation works. You will essentially be taking out a new loan to pay off your existing loans. The difference is you have one loan rather than multiple loans. This can help you stay more organized. It should also save you money as long as you find a loan with a lower interest rate and/or payment.
There are several ways you can consolidate your debt. The most common are with a balance transfer credit card or a personal loan. You can also take out a home equity loan to pay off your debts. Each option has its pros and cons. Try weighing each option to see which would save you the most money. Remember, the longer you borrow the money, the more interest you pay. No matter how much lower the interest rate is, the longer the term, the most it costs in the end.
Finding Debt Consolidation Lenders
Once you know the type of debt consolidation you want, it is time to find debt consolidation lenders.
Start With Your Local Bank
If you have a bank you have a relationship already, you may want to start there. Talk to them about the options they have available for you. They may have loans with lower fees simply because you are a current client. A bank you already do business with may have fewer requirements too. They will likely pull your credit and look at your qualifying factors, but they may be more lenient. They already know your pattern for making payments which is a big part of the puzzle.
If you do not want to use a bank, you currently do business with, check out your other options.
Borrowers With Good Credit
Borrowers with good credit have more advantages. You have more options to choose from. Most banks will be likely to lend you money if you have good credit. You do not have to look for subprime or peer-to-peer lenders. Instead, you can stick with the mainstream banks. Use your good credit score to your advantage too. You can comparison shop and let lenders know you are doing so. This gives you the advantage because lenders may give you lower interest rates and/or fees as a result. If they want your business, they will compete for it.
Borrowers With Average Credit
If you have average credit, you might have to do some shopping around. Not all lenders accept “average” credit scores. They prefer excellent scores, such as those over 700. With an average credit score, you will need a great debt ratio and a consistent income. Anything that a lender considers risky could prevent you from securing a debt consolidation loan. Borrowers with average credit should stick with local banks, online lenders, and even peer-to-peer lenders. These are individual lenders lending the money directly to you. They cut out the need for the bank. But even individual investors have certain thresholds for credit scores.
Borrowers With Poor Credit
Being in over your head in debt often goes hand-in-hand with poor credit. You may not have luck with standard banks. Instead, you will want to shop with peer-to-peer lenders and online banks. Certain subprime banks specialize in loans for borrowers with poor credit. To make up for it, though, you will need to provide compensating factors. Lengthy employment at the same employer, numerous assets, and a low debt ratio can only help your case.
What to Ask Debt Consolidation Lenders
Once you find a few lenders, you will want to ask them specific questions. This way you know which lender is right for you.
- Will the lender pay your creditors for you? This is an important step. It helps keep your funds out of your hands. Instead, the lender sends the payment directly to your creditors. This way you know your debts are consolidated. If the funds come directly to you, it is easy to mismanage the money and spend it. Then you are left with an additional debt, which was not the idea of debt consolidation.
- What are the fees? Consolidating debt does not automatically save you money. The fees the lender charges matters. Look closely at all fees. Some lenders charge upfront fees and closing fees. Others also charge annual or monthly fees. Add everything up and see what it costs. Remember this adds to your total debt. The idea is to get out of debt, not stay in it. Compare fees between lenders and choose the least expensive option.
- What is the interest rate? The interest rate plays a role too. You should not look at the interest rate on its own, though. You will also want to consider the term, which we discuss below. For the sake of the interest rate, you want the lowest one possible. At the very least, you want a rate that is lower than the average rate on your current debt. It does not make sense to consolidate if you will pay more interest.
- What is the term? Stretching out the repayment period too long can add to your debts. For example, rolling a 5-year secured loan into your home equity loan turns it into a 20-30 year loan. This means you will pay interest on that debt for 20-30 years. This is why it is important to look at the interest rate and the term together. A lender that offers a 4% interest rate on a 30-year term is not any better than a lender offering a 5% rate on a 10-year term. Yes, you will pay a higher interest rate on the latter option, but you will pay the debt off faster. Ask the lender the total amount of interest you will pay over the life of the loan to help you decide.
Should You Consider Debt Consolidation?
Before you shop for debt consolidation lenders, consider if it is right for you. Ask yourself the following questions:
- Can I afford my current debts? If you cannot make ends meet, debt consolidation may be the right choice. Even if you stretch the payments out a little bit, it may prevent default. This is important for your credit history. If paying your current debts on time is a struggle, it is time to get help.
- Will I save money? Debt consolidation does not automatically mean you will save money. If the interest rate is higher or the fees are excessive, it may cost you more money. Again, ask the lender about everything before deciding. We suggest you compare offers from at least 2 to 3 lenders to make sure you make the right choice.
- Will I stay out of debt? This is a big one. If you cannot trust yourself not to rack up your credit cards again, it may not be the right time. Paying off your credit cards with another loan does not mean you should use them again. But, you also should not close them. Instead, put them somewhere safe and do not touch them. This way you help your credit score increase and pay your debts down at the same time.
Comparing debt consolidation lenders is a big job. You will need to shop around and ask a lot of questions. Always read the fine print and know what you are getting yourself into. Not every debt consolidation loan is a good idea. Find one that offers you the best interest rate and costs and start saving money. There are many resources at your disposal. The internet provides a wealth of information. See what others have to say and find the loan and lender that is right for you.