Choosing a Debt Consolidation Loan Lender
The use of credit cards in place of personal finance has become increasingly popular in the US, with more consumers accumulating heavy debt balances. Additionally, with loans being a significant part of the US economy, people have more loan contracts to settle, including student loans, mortgages, car loans, and other complex loans. This means making different repayments separately every month. If you have credit cards with substantial balances and a couple of loans to repay, then debt consolidation would be your most ideal way out. Although applying for a new loan affects your credit rating, consolidating your debts help you to efficiently manage the debts, saving you hundreds or even thousands of dollars.
Here is an overview of what consolidating your debts mean and how to choose the best debt consolidation loan lender.
Debt Consolidation Loan Explained
A debt consolidation loan is a new loan that allows you to put together all your debts into a single account under one lender. The loan is used to repay all of your other old loans, leaving you with a mandate to repay the consolidation loan instead of making several different repayments in a month. A debt consolidation loan comes with a lower interest rate and monthly installments compared to the repayment of multiple loans. If you choose the right lender, having a debt consolidation loan can prove to be of great benefit to your financial life.
How Debt Consolidation Loans Work
The main objective of these type of loans is to merge all your high-interest debts existing in the form of multiple loans into a single payment with a lower interest account. How debt consolidation loans work depends on the kind of loan you take. Debt consolidation loans are categorized into two, namely secured and unsecured loans.
A secured loan in debt consolidation requires you to issue out collateral as security. An example of such loans is the home equity loan where the collateral is the equity to your home. Secured debt consolidation loans often come with a lower interest rate than the unsecured loans.
An unsecured debt consolidation loan, on the other hand, does not require the issuance of collateral. These loans are easy to apply for, but they have higher interest rates tied to them.
Annual Percentage Rates (APRs) and Debt Consolidation Loans
How efficient your consolidation loan will be in saving money is dependent on how low the APR is. APR is the total annual cost of your loan, which is a reflection of the loan’s interest rate and origination fees. The average APR on a debt consolidation loan falls at around 18.56%. However, this rate may vary from one lender to the other. APRs are also influenced by such factors as the type of loan, credit score, and debt-to-income ratio. This means that APR on your loan may be lower or higher than the market’s average. Typically, the annual percentage rate on consolidation loans across different lenders falls between 8.31% and 28.81%.
How to Choose the Best Debt Consolidation Loan Company
Choosing a debt consolidation loan provider is a significant decision for an individual’s financial life. With the numerous lenders available in the market, however, it can be quite overwhelming choosing your ideal consolidation loan company. Here are some factors to watch out for when making that choice;
Interest rates determine how much you will have to pay at the end of the month. You want a lender with the lowest and the most competitive interest rate. It is also essential to check out on the type of interest rate offered by a company. Interest rates are categorized into fixed and variable interest rates. Fixed interest rates are constant throughout the life of a loan. Variable rates, on the other hand, are subject to changes in the US prime rate. This means that you can have a low interest rate at the beginning of a year, and end up paying more at the end of the same year.
Different lenders have varying fee structures and penalties tied to their debt consolidation loans. Fees and penalties to such loans include the loan processing fee (known as the origination fee), late repayment fee, check processing fee, returned payment fee, and the prepayment. These charges add to the total cost of your loan. You should, therefore, examine a company’s fee structure before deciding to make a borrowing.
The best debt consolidation company should be highly reputable in their financial services. You can browse through a company’s website for some reviews. It is also important to verify that a consolidation loan company is registered under authorities such as the Financial Counseling Association of America. You can also check with the Better Business Bureau (BBB) for accreditation. Always go for a loan lender with the most reputable reviews and numerous accreditations.