Millions of American consumers are buried in credit card and loan debt. The large emphasis placed on maintaining a positive credit rating often leads many to open too many accounts and spend more than they can afford. Due to high interest rates, credit cards that have high balances can take years to pay off.
In a situation like this, a debt consolidation loan could be the best way to get out of debt and lower your monthly payment.
What is a Debt Consolidation Loan?
A debt consolidation loan is primarily used by consumers who need to pay off high interest debt. Once the debt is paid, the borrower only has to make payments for the debt consolidation loan. The main benefit of taking out this type of loan is that the borrower can save on credit card interest payments.
Once a debt consolidation loan is approved, the lender will distribute payments to the credit card companies until the balances are paid off, and then distribute the remainder of the loan to the borrower. These types of loans are normally approved for terms of between three and seven years, and at interest rates of less than 15 percent, depending on the applicant’s credit history.
Where to Apply for a Debt Consolidation Loan
Debt consolidation loans are available at most major local and national banks. Certain online lenders also underwrite debt consolidation loans however, consumers must perform due diligence to ensure the lender is trustworthy.
Reputable online lenders often offer more favorable borrowing terms, like a lower interest rate or higher loan approval amount.
When to Obtain a Debt Consolidation Loan
Debt consolidation loans should only be obtained when a consumer thinks he or she is unable to pay their current monthly credit card bills. Credit card debt usually needs to be more than either $5,000 or $10,000 total for debt consolidation approval, depending on the lender. Potential borrowers should also examine their ability to repay the loan back over the course of the borrowing term, even if the loan will reduce the amount of money they pay every month.
If a consumer is unsure of whether or not they need to obtain a debt consolidation loan, they should consult with a debt consolidation program advisor in order to make an accurate analysis of their current situation. Prior to taking out the loan, consumers should also attempt to contact the credit card companies to negotiate settlement amounts if they plan on closing any revolving credit accounts.