Debts can be unavoidable in any economic landscape. Though hearing the word “debt” might be frustrating, it can be a way for us to be able to have additional funds when we don’t have any that is readily available. Debts can also work as an emergency fund and sums up as something that you can use today while paying for it later via instalment basis. However, when a single debt is topped up with additional debts, you might wonder how you will be able to pay them all given the fact that it requires interest, and loan providers have variations in interest percentage for different loan purposes.
When you have several debts to pay, it somehow becomes a lot more stressful as you seem to not have the financial freedom that you want. Yet, you can always opt to pay them collectively with debt consolidation.
What is debt consolidation?
Debt consolidation is a way to pay off several debts by making another debt in a way of refinancing them. This single loan can pay off other existing debts, and is usually used by individuals to address high consumer debts, and consolidating them into one while trying to avoid not paying them individually. Debt consolidation can cover any type of debt, including student loans, personal loans, auto loans, and even credit card balances that seem quite hard to juggle and settle single-handedly. Hence, it is a loan where you can pay all different debts into one monthly payment, and it could be a way to simplify or lower your outstanding payments. Additionally, it creates a pooled payment and a way to manage your repayments and can also help you pay off debts sooner with saving interest costs.
What are the requirements for debt consolidation?
Applying for debt consolidation is easy. You just need to calculate your principal loan monthly payments and terms, check your credit history, make a list of what you owe, details of your living expenses, and finally your employment details.
For the calculation, there are a lot of loan calculators for you to use online. You just need to fill in the details and the calculator calculates everything for you. On the other hand, the eligibility for loan consolidation should include your credit history. You must be a good payor and a good user of your existing loan, so you can be approved when applying for debt consolidation. Moreover, you should also make a list of your existing loans; this is a way for the debt consolidation creditor to check how much you may borrow, in line with the loans you want to pay sooner. Furthermore, you must also include your living expenses, so it can be checked when you should be paying your debt consolidation following a good payment schedule. You must include everything for this, like car insurance, gym memberships, and anything that is paid monthly. Correspondingly, your employment details are the most important thing to apply for loan consolidation. Your employment status, as well as your monthly compensation, will be assessed whether or not you will be able to pay for the loan or not; still considering the list of your monthly payments and your loans as a whole.
Does debt consolidation affect your credit score?
The simple answer for this is YES. Opting for debt consolidation means you have an additional new loan, and hard inquiries can mean you are a new risk for lenders when applying for an additional loan. However, the decline of your credit score is just a short-term effect; once you can pay the consolidated debt regularly and without lapse, your credit scores can have a potential rise and you’ll be eye-candy for other loan providers given the fact that you can pay your loans without any delays.
New credit applications mean that you have potential risks; debt consolidation works as an additional loan, but in essence, is a way to help you reach the financial freedom that you want. More so, you’ll also have a lower average age of credit, due to opening a new account that adds as a new recent account that lowers your average account age. These underlying considerations can have a dip in your score for a while, but on-time payments can do the trick.
Still, opening a consolidated debt isn’t all negative. For instance, you’ll have a lower credit utilization ratio —- this means that you’ll have an increased credit limit, and paying them on time reflects positively on your credit score. When you have a consolidated debt, you will not need any additional accrued loans for a while, which makes you have more control over your debt. Nevertheless, paying on time will have a good note on your payment history that counters the negatives for consolidated debts; your credit score will slowly rise, so it is highly recommended to pay on time.
Can I consolidate my debt before applying for a mortgage?
You can always have your collective payments first before applying for a mortgage. Yet, you must be a good payor of your consolidated debts before it is due that your credit score will bounce back higher. The sooner you pay your consolidated debts, the more chances that your mortgage will be approved. As always, pay your repayments on time to avoid putting potential negative risk scores on your future loans. The bottom line here is to at least pay regularly for several months, so inquiries for your scores will be lesser as it will show that your bills are paid on time.
Is debt consolidation worth it?
It is always a good idea to have your debts consolidated when you can pay regularly for your primary loans. However, if you still have a hard time paying them before your application to consolidate your debts, then you must revisit your plans of applying. Usually, consolidated loans give higher interests if you have failed to pay regularly your primary loans. Thus, you must ensure that your credit score has improved already, as it will make no sense to apply if you have handled your loans poorly; higher interests may lead you to over-drop with your payments and can make you pay even more in the future.
Even so, consolidated debts can streamline your finances by reducing the number of payments and interests. It reduces late payment probabilities, more so it may expedite your payoff. Consolidating your debts means that you will be accruing less than paying individually on existing loans, which can help you pay your debts earlier and hence saving more on interests in the long run.
Will I get approved for a debt consolidation loan?
Being approved for the loan is not guaranteed. Lenders should assess your finances first, accompanied by your loans so they can assure that you can pay for your consolidated loan without a doubt. Still, if you have a good credit standing on your existing loans, it’s a no-brainer that you’ll easily get approved when you apply for one.
You can also consolidate as many debts as you want, as long as it does not go beyond the maximum loan amount that will be approved for you.
How to refinance debt consolidation?
Refinancing your debt consolidation loan is good when you can assess that you can pay another loan on top of your existing loans. You can refinance when you have a good credit score, and also knowing that the lender offers you better financing options with lower interests. If you are already certain of this, you may contact your lender and pay off the consolidated debt, and again pay the refinanced loan after.
But remember to always look after your spending. Refinancing does not necessarily mean you should have several loans after, as this may lead you to go in the same spiral again and therefore applying for another debt consolidation loan. So always be careful and budget your expenses.
