Consolidation is a popular strategy for getting out from under a pile of debt, particularly credit card obligations. You take out a loan to cover smaller debts, making bill paying more manageable. Debt consolidation should also lower your interest rate and monthly payments.
The rub is that interest rates on these loans are all over the board – ranging from as low as five percent to as high as 36 percent. It’s illogical to consolidate unless you can snag a loan that’s at least half of what you’re currently paying.
Here’s how to get a low-interest debt consolidation loan.
About Interest Rates
First off, let’s examine “interest rate.” Simple interest is basically what you pay for the opportunity to borrow. If an institution lends you $1,000 at a six percent annual interest rate, for example, you must fork over $60 along with the $1,000 when you repay the loan.
Most lending institutions, however, use what’s called compound interest, wherein you pay interest both on the initial $1,000 and on the accumulated interest. The rate that debt grows hinges upon how frequently the loan compounds – usually monthly with credit cards.
How Are Debt Consolidation Loan Rates Calculated?
The two factors that figure most prominently in determining a consolidation loan’s interest rate are your credit score and willingness to put up property as collateral. Collateral is a borrower’s pledge of specific property to a lender to secure loan repayment.
In any case, loan rates and terms can vary, depending on your situation. As of last July, the average interest rate for a debt consolidation loan was 11.09 percent.
What Steps Should I Take For A Low-Interest Debt Consolidation Loan?
First, improve your credit. Get copies of your reports and scour them for errors that, when fixed, could help you. Even a small bump upward can save you money. Consumers with credit scores of at least 740 get the best rates on consolidation loans, while anything under 660 will result in a higher rate, though perhaps not as high as the rate for credit card debts you’re trying to erase.
Keep in mind that with a better credit score you can not only land a better rate on consolidation loans you can also become eligible for other kinds of low-interest loans, should you need them in the future.
Shop around for the best interest rate and get three quotes for comparison, at minimum. Because credit unions prioritize members’ needs, they often have better rates than banks. If you have a good relationship with your bank, though, do try there as well.
If you’re considering the online lender route, stick to reputable companies and read the fine print about interest.
Also, be certain to apply for a fixed-interest loan and not a variable interest rate, which could add to the loan cost.
If applying in person for a loan, be mindful that the lender may ask you what you plan to do with the funds, so understand your financial picture and what the loan can do to improve it. Be sure to take with you proof of income and address, identification, and social security card. You’ll also need to have this info handy for online loan applications.
Don’t be afraid to ask questions about the underwriting process and how it works. Be certain you understand the timetable as well. Now that you know how to get a low-interest consolidation loan, you can proceed with confidence and plant your feet on the road to recovery.