Your debt has been tailing you for a long time now and you need to finally vanquish that unwanted shadow. You’re thinking a debt consolidation loan might be just the thing, but you don’t know if it fits your situation.
Is a bank debt consolidation loan a good idea? Well, let’s first define a few terms. This kind of loan is a personal loan that can be used to erase high-interest debt – usually credit cards. Instead of having multiple bills each month of varying amounts, you have only one payment of the same amount each time. So, bill payment is streamlined.
What’s more, the interest rate of your loan will likely be lower than what you’re paying aggregately on your current debt, which will save you money.
When Debt Consolidation Could Be a Good Option
There are some ways in which you can know whether you’re a prime candidate for debt consolidation. Those include:
- You have good credit. While loans are available to people with all kinds of credit, those with good or excellent credit get the plum terms and interest rates. You’ll need at least a 670 score.
- You have high-interest debt. The average interest rate stays around 16%, while the average personal loan interest rate is 9.41%, according to Experian. So, you can save good money if you can qualify for a lower rate.
- You know how you’ll repay. Using your card and just making minimum payments can keep you stuck on the debt merry-go-round. By contrast, personal loans can be a great alternative since they have a set repayment term. Still, you’ve got to be motivated to stick to your plan.
When Debt Consolidation May Not Work for You
While debt consolidation is a proven financial strategy, there are some situations in which you may want to try something else:
- You don’t intend to pull back spending. If you rack up new debt after paying your cards off, you could wind up in a bigger hole than you are now. If you’re going to go the consolidation loan route, do some soul-searching about your spending. It also will help for you to make a budget so that you can see where your money’s going.
- Your credit isn’t up to snuff: Yes, you can get a consolidation loan with bad credit, but it likely will come with a higher APR, which could raise your costs and prospectively make the monthly payments unmanageable.
- You don’t have much debt. If there’s a chance you can eliminate your credit card debt in the next six months to a year, savings from a consolidation loan may not offset the homework you’ll need to do to find the right lender, then go through the application process.
Where to Get a Debt Consolidation Loan
You should start your hunt for a loan with your bank or credit union. Credit unions in general have looser restrictions than do national banks, but if you have a good relationship with a bank, you may want to check there. Some online lenders allow you to prequalify online, which doesn’t hurt your credit and gives you some idea of what you likely qualify for.
Some lenders offer variable as well as fixed rates, so be sure you’re comparing loan apples to loan apples. To get the right fit, you should consider repayment terms, loan amounts, and other features. Ideally, you want a debt consolidation loan that offers low interest rates, flexible repayment terms, and small or even zero fees.
So, is a bank debt consolidation loan a good idea? It depends on your situation. If you do go that route, see your plan all the way through. Financial freedom awaits.