You’ve heard that debt consolidation loans are an option when you want to start paying off your bills and work toward the day when you’re living debt-free. However, before you rush to apply for a loan, here are a few things you should know.
1. Know your credit score
Everyone who has ever used credit, such as credit cards and lines of credit, has a credit score ranging from 300 (the lowest) to 900 (the highest). Scores are calculated by independent agencies and automatically updated.
Credit scores matter because banks and other lenders use your credit score to determine what kind of loan they can offer you and what interest you’ll need to pay. The number you want is 670 or higher. This helps you clear the first hurdle on your way to getting the financial relief you need at the most affordable monthly rate.
You can access your credit report online for free from Equifax and TransUnion. Accessing your credit report online allows you to see it right away. Other companies may also offer to provide your credit report for free.
2. Make a list of what you owe
Grab a pen and a piece of paper and write down all the credit you have and the balances for each, specifically:
- Credit cards
- Store credit cards
- Personal, student, or car loans
- Lines of credit
Add up the balances you want the debt consolidation loan to pay off. Then, add up the payments to see what (on average) you pay each month. This will provide you with a sense of how much you can pay and stay within your budget.
Check out our debt consolidation calculator to estimate your costs.
3. Apply for a debt consolidation loan
After you’ve checked that your credit report is accurate and you’ve taken some steps to improve it as much as possible, it’s time to consider what kind of debt consolidation loan you might be eligible for. If your credit score is really good, meaning above 670, you may qualify for a loan from a bank or credit union. If you have something to offer as collateral, you may even qualify for a ‘secured’ loan at a really good interest rate.
However, if your credit score falls below 670, you’ll likely be applying for a bad credit installment loan. You’ll need some basic documentation to apply:
- Proof of income
- A void cheque so you can set up automatic payments
You can also consider adding a co-signer who has good credit to the loan. This may help you qualify for the loan you need and get a lower interest rate.
Before finalizing your loan, be sure to understand what your interest rate is and how it gets calculated. Make sure that you are happy with the length (or term) of the loan, and how much the payments will be to ensure that they fit within your budget.
You should be given the option of choosing the term and the frequency of your payments. If you don’t feel you are getting transparent answers and being given enough flexibility to personalize your loan, keep shopping.
4. Use the loan to pay off your debts
Debt consolidation works as a financial strategy if you use the money you borrow to pay off your existing debts. Some lenders will pay off the creditors you owe directly with the proceeds of the loan. If this is the case, be sure to check to ensure all outstanding debts have a zero balance.
If you have to repay the debts directly, simply take the loan proceeds from your bank account and pay off each credit as soon as possible. This will ensure you don’t incur any additional interest and there are no outstanding balances. After the debts are paid off, you will start to pay your debt consolidation loan – weekly, bi-weekly, monthly or bi-monthly.
Consolidating debt is a big decision that comes with upsides and downsides. It’s best to talk to a lending expert to understand what’s best for you. Give us a call or come into one of the easyfinancial branches to discuss.
Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.