Debtors can use the best debt consolidation loans to combine many high-interest debts into a single monthly payment. If you’re like many Ghanaians who have heavy credit card debt, you’re probably looking for ways to get out of it. Debt consolidation loans are one way to reduce your debt and make it easier to repay.
Look for cheap rates, flexible periods, and consumer-friendly features like direct payment to creditors when researching debt consolidation loans. Read along to learn more about debt consolidation, how to choose the best and how to qualify.
What is a debt consolidation loan?
Multiple unsecured obligations, such as credit cards, medical bills, and payday loans, are consolidated into one fixed monthly payment with a debt consolidation loan.
If the interest rate on the loan is lower than the combined rates on your existing bills, a debt consolidation loan is usually a wonderful decision. You’ll save money on interest and may pay off your loan sooner at this lower rate.
A debt consolidation calculator can help you calculate your interest savings and new monthly payment, as well as evaluate different loan possibilities.
How can I choose the best debt consolidation loan?
Compare these factors when you’re deciding between debt consolidation loans:
1. Annual percentage rates
Because it includes all fees and interest charges, the APR shows the loan’s true yearly cost. Your interest rate is determined by your credit score, income, and debt-to-income ratio. APRs can be used to compare multiple loans. Choose a low-interest rate with affordable monthly payments.
2. Origination fees
To offset the costs of processing your loan, some lenders charge origination fees. The one-time fee is usually between 1% and 10% of the loan amount, and it is either removed from the loan revenues or added to the loan balance. If the cost is deducted from your loan proceeds, you’ll need to request a larger loan amount than the total of your debts to cover the fee while still having enough money to pay your creditors.
To keep costs down, avoid loans with this fee unless the APR is lower than other no-fee loans.
3. Lender features
Some lenders provide consumer-friendly services such as direct payment to creditors, so after they close your loan, the lender pays off your existing bills, saving you the trouble.
Free credit score monitoring and hardship programs that temporarily lower or halt monthly payments if you have a financial setback, such as a job loss, are other things to look for.
Qualifying for a debt consolidation loan?
There are ways you can qualify for a debt consolidation loan. They include:
1. Build your credit
Most loan approvals are based on your credit score and capacity to repay. Although individuals with weak credit can gain a debt consolidation loan, those with good credit (FICO 720 to 850) have more lending options and may qualify for lower rates. If you have fair or terrible credit (FICO score below 690), it may be beneficial to work on improving your credit before applying for a consolidation loan.
2. Add a co-signer
Because of bad credit or low income, adding a co-signer can help you qualify for a debt consolidation loan that you wouldn’t be able to get on your own. Your co-signer faces dangers, therefore, they must deliberate their options.
3. Shop around
Before applying for a debt consolidation loan, look for the best rates and terms. Most internet lenders will allow you to pre-qualify with a soft credit inquiry, which has no effect on your credit ratings.
Preparing for a debt consolidation loan
In order to get a debt consolidation loan, you must prepare for it. And you can do this by:
Create a budget that assigns a percentage of your income to debt repayment before your loan is funded and tracks your progress with a budgeting and saving app.
2. Curb spending
While paying off debt, avoid making large purchases on your credit cards, but don’t close any of them. Cancelling credit accounts might have a negative impact on your credit score.
3. Commit to the long-haul
For many people, consolidating debt is a good idea, but it’s vital to understand that the debt doesn’t go away; it just transfers somewhere else. Most debt consolidation loans have periods ranging from two to seven years, so plan on making your monthly payments on time.
Will debt consolidation hurt my credit score?
Consolidating debt with a personal loan has the potential to both improve and damage your credit score. When you use the loan to pay off your credit cards, you lower your credit utilization, which is the percentage of your credit limit that is used. They can improve your credit scores by lowering your credit utilization.
Applying for a loan causes a hard credit check, which can temporarily lower your credit score. Your credit score will suffer if you go back to racking up new credit card debt.
How to pre-qualify for a debt consolidation loan
Pre-qualifying for an online loan might provide you with early access to loan details, such as the interest rate. You may compare offers and discover the best rate by pre-qualifying with different lenders in Ghana.
Other ways to tackle debt
Getting a debt consolidation loan isn’t your only option for getting debt under control.
1. Zero balance transfer credit card
Transferring debts to a 0% balance transfer card may be a viable alternative for borrowers with good to excellent credit (690 FICO or better), as long as you can pay it off throughout the promotional period.
2. Credit counseling
Nonprofit organizations provide credit counselling which involves assisting you in developing a debt management strategy. These programs, like other debt consolidation products, combine your bills into a single, manageable payment with a lower interest rate.
3. Debt payoff strategies
You may not need to consolidate if you’re unsure how to handle your debt. The debt snowball and debt avalanche are two popular debt-reduction tactics. Besides that, the snowball strategy prioritizes paying off your smallest debt first, gaining momentum along the way. The avalanche prioritizes paying off the debt with the greatest interest rate first, then putting the money toward other things. Both can help you get a faster payoff.
Debt consolidation loans help debtors to consolidate several high-interest obligations into a single monthly payment. No one appreciates being in debt. Furthermore, debt deprives not only you of peace of mind but could also reduce your credit score.