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What to Look for in a Debt Consolidation Loan

If you’ve ever carried a balance on credit card accounts with high interest rates, then you’ve experienced firsthand what it feels like to see a significant chunk of your payment go toward satisfying these interest fees rather than putting a dent in the balance you owe. This is one of the most frustrating — not to mention expensive — aspects of using credit cards.

Consolidation loans offer some borrowers an opportunity to step out of this costly credit card cycle, using the funds from a single loan to pay off those accounts with high interest. It tends to be simpler to make fixed monthly installments than it does to juggle multiple revolving credit card accounts, too.

As much as consolidation loans can simplify and speed up the debt repayment process for some borrowers, it’s always important to shop around to find a competitive product before applying. After all, you are committing to repaying a large sum of money, so you want to be sure you’re making the right decision before forging ahead.

Here’s more on what to look for in a debt consolidation loan.

Factors to Consider When Comparing Consolidation Loans

Just like credit card offers, debt consolidation loans vary by borrower and by consumer credit standing. These are some of the most important factors to consider when comparing the ins and outs of various loan offers.

Loan Amount

A general rule of thumb is to borrow only the amount of debt you can realistically pay off within five years. This makes consolidation a potential option for people with medium amounts of debt. Those with much less debt can probably pay off their debts on their own with a little strategizing; those borrowers with more debt may need to explore more serious options, like settlement.

Some lenders offer consolidation loans for as little as $1,000 while others start higher, closer to $5,000 or $7,500. Similarly, lenders cap their loans at different amounts.

Loan Length

It may seem appealing to choose a long loan length, like seven years, to lower monthly payments. However, this may be a recipe for paying more in the long run. Debt consolidation loan experts generally advise consumers to get the shortest loan you can that still allows for monthly payments within your budget.

Annual Percentage Rate (APR) Range

A deciding factor in whether or not a consolidation loan is worth it is the APR for which you qualify. Your credit rating will be the biggest determining factor here, although different lenders offer loan products with varying APR ranges. Interest rates on consolidation loans tend to range from approximately 6 percent to 36 percent.

This is where shopping around for the best rates, and trying to optimize your credit score before applying, will play a major role in the final outcome.

Credit Score Requirements

Some lenders set minimum requirements necessary to qualify for their loan products. Some lenders will approve borrowers with lower credit scores, although they will likely set their interest rates higher to offset the increased risk they have assumed.

Knowing the minimum requirements outlined by a lender before applying can help you avoid wasting your time and enable you to focus on those loans for which you’re most likely to qualify.

Additional Fees

The objective in taking out a consolidation loan is not only to make repayment easier, but also to decrease the amount you end up paying. This is why it’s so crucial to look out for fees – and to make sure they don’t offset the potential savings. Origination fees are one example.

Looking out for these factors can help you choose the debt consolidation loan best suited to your situation.

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