Many troubled consumers consider debt consolidation as a solution for overwhelming credit card debts. This method simplifies your finances and can offer a reduced interest rate when done correctly. The question then now becomes how do you get a low-interest debt consolidation loan?
Debt consolidation loan interest rates vary from as low as 5% to as high as 36%. Typical credit card interest rates average 16% and can quickly advance if you make late payments or default on monthly payments altogether.
These tips will help you get a low-interest debt consolidation loan:
Improve Your Credit Score
A great credit score gets makes you eligible for low-interest loans from credit unions, banks, and online lenders. Following through on a commitment to timely monthly payments may improve your score, helping you qualify for deals such as a zero-balance interest balance transfer credit card. It’s also a good idea to check your credit history to ensure your reports are accurate. Errors on your reports could be dragging your scores down. Many banks and credit card issuers will allow you to check your score for free. Otherwise you can get it for a small fee at any of the big three credit reporting agencies.
Consider A Co-Signer With Good Credit
Engaging a co-signer when looking for a low-interest debt consolidation loan may mean you could qualify for a loan that you previously couldn't. A co-signer is a close friend or family member willing to share equal responsibility for the personal loan. Your co-signer should have a good credit score and meet the lender's minimum requirement because they will qualify you for a lower interest rate on the debt consolidation loan.
Have Collateral To Secure The Loan
Offering collateral will almost always get you a low interest debt consolidation loan. Lenders are typically more confident you will make your monthly payments on the debt consolidation when your property, which you put up as collateral, is on the line. The lender is more likely to offer you a lower interest rate because they have something to fall back on if you default on payments. Of course, the other side here is you’ll be forced to sell your home if you default on the loan, so be careful with this one.
Lower Your Debt To Income Ratio
Find ways to increase your income and pay off lesser debts if the need to consolidate your debts isn't immediate. This helps improve your debt to income ratio, which lenders use when evaluating your ability to pay off a loan. A good debt to income ratio will help lower the interest rate charged on the debt consolidation, as it demonstrates you have the capability to pay off the debt.
Ensure You Opt For A Fixed Interest Rate Loan
Debt consolidation companies offer two types of interest rates — fixed or variable, depending on your debt. A variable interest rate means the monthly payments will change over time. Meanwhile the fixed-rate ensures the monthly payments stay the same over the term of the loan. While variable-rate loans look less costly at first, they usually increase the total cost of the loan.
Stop Using Your Credit Cards
Once you are in a position where debt consolidation is your only option, you should stop using your credit cards. Adopt a commitment device that will help you avoid running up new charges. To stay committed, list why you want to stay debt-free, the expected payments and reminders to this fact, and your progress.
Debt is often construed as a shameful subject; however, surrounding yourself with a strong support system is the first step towards enjoying a debt free life. These tips will help you get a low interest debt consolidation loan that will ultimately make shouldering your obligations easier.