If you are looking to get rid of your debt, you might not have thought of taking out another loan. These loans, called debt consolidation loans, can potentially pull you out of a sticky financial situation. Below, you will find what you should and should not do when making this important decision.
DO know your FICO credit score, and DO get your credit report.
Your ability to get a loan, as well as your interest rates, are based on your FICO credit score. The three credit reporting agencies of the United States, Experian, Equifax, and TransUnion, are required to provide you with a free copy of your credit score at least once per year. Below are the ranges for credit scores, and what they mean for you.
300 to 499 – Very poor credit.
500 to 579 – Poor credit.
580 to 619 – Low credit.
620 to 679 – Average credit.
680 to 699 – Satisfactory credit.
700 to 850 – Excellent credit.
If your score falls above the “average” range, it will be easier for you to apply for loans. This is because you have shown that you pay off your debts in time, and have probably never before defaulted on a loan.
DO keep in touch with your credit card company.
If you have a high credit score, make sure you contact your credit card company to see if you can lower your interest rates. You might be surprised at what they can do.
DO seek advice.
Credit counseling agencies are places that offer advice for rates that are typically low, and affordable for the average person. After making sure your agency of choice is reputable, you can go in, be assigned a credit counselor, and have another opinion on what to do next with you finances.
DO talk with your mortgage holder.
If you are having trouble paying your monthly mortgage, your mortgage holder may be able to help. If he or she has a good reputation, he or she can probably extend your payment term until your money is, once again, stable.
Another idea to consider would be refinancing your loan, which could lower your payments based on your home’s worth. It’s surprising how much money you could save, with just a short meeting.
DO get rid of debt.
One of the downsides to taking loans is debt, which should be paid as quickly as possible. If you feel it would be feasible, try to set the monthly payment on your loans as high as possible in order to avoid elevated interest rates and prolonged payment periods. Paying ahead of time, too, is a common action of many responsible loan holders. In essence, paying more in the beginning can save you hundreds down the road.
DO get the best deal.
Don’t just take the first offer you find. In order to find the best option, you might spend a few weeks “shopping around,” comparing initial payments, interest rates, and payment plans. Only make a final decision after you have examined the offerings of three or four different lenders.
DON’T neglect other options.
Before you sign a loan that holds a payment plan of seven to ten years, you might want to take a look at your current financial situation. If you’re not in a bad place, you might want to take into the thought the option of what banks call “snowballing” your debts, or paying them off as fast as you are able. To do this, you should pay as much as possible on the debts that have the highest interest, while only paying the minimums on those that don’t have as much. Some people who have done this have become debt-free in less than two years.
DON’T do balance transfers without research.
While your balance transfer card might offer a 0% APR at first, be aware that the rate could skyrocket to over 20% over the course of a few years. This is not a problem if you have paid off your balance before that time, however it could spell danger if you are not aware of the length of the low, introductory rate.
DON’T sign up for any management plans.
While getting a credit counselor is a good idea, don’t allow them to convince you to sign up for a debt management plan. These can often extend your payments to five years or more, and might cost you all of your credit cards.
DON’T take from your life insurance.
More often than not, pulling money from your life insurance could make for higher taxes and, as a result, more debt than the amount with which you began. Also, you are denying your beneficiary money that might be more than needed in the future.
DON’T get the wrong loan.
There are two types of debt consolidation loans: secured and unsecured. Secured loans, like second mortgages and home equities, are held by an asset that can be taken if you do not make your payments in time. Unsecured loans, like normal mortgages, do not put any of your property at risk.
In all, be wise about what you do and do not do with your debt consolidation loans. As long as you are willing to take the time to find the option that is the best for you, you can find yourself happy, free, and out of debt. Stay on top of your finances, in order to keep them from getting on top of you.