If you are struggling to pay your debt, getting a debt consolidation loan may seem a logical solution for you to come out of your debt situation. With a debt consolidation personal loan, you can reduce the amount you pay each month and stop having financial worries. The following are 5 tips on using a personal loan for debt consolidation.
1. Determine How Much You Can Set Aside Each Month
Before shopping around, you must evaluate your finance to find out whether you can afford to repay the loan. If you keep a ledger, you know how much is your monthly expenses. From there, you can roughly estimate how much you will left in every month to pay for the loan. You should have more than the needed amount for paying back the loan. This ensures that you have enough money to cover other financial expenses that may arise during the loan term.
2. Decide Whether You Want a Secured or Unsecured Loan
You also must determine whether you want a secured or unsecured loan. Secured loan is easier to apply and has lower interest rate. The interest rate you pay on a secured loan is also tax deductible. The downside of a secured loan is it takes longer to pay off and you risk your asset getting repossessed when you falls behind on payment. With an unsecured loan, you do not put any risk on your assets. It has a shorter repayment term which means it will cost you less interest in long term.
3. Use a Loan Comparison Tool to Compare the Loan Offers
When shopping around, you must always submit your data to the loan comparison tool first to find the cheapest debt consolidation offers. As you scroll through the loan offers, you can fill in the preapproval forms of the loans that you are interested. Doing so allows you to find out what interest rate you are likely to qualify for. You should total up the monthly payment of the personal loan and compare it to the total you would pay if you keep paying your credit card company. The total cost of the personal loan must be lower in order for it to be worthwhile to take out that loan.
4. Compile a List of Financial Documentation You Need to Submit
You can compose a checklist of the document you need to submit. If you aren’t sure, you can call the bank and ask them to give you the full list of documents you must submit. You may have to talk to your employer, bank or creditors to compile the documents. If you did not submit complete documentation, the bank will call you and ask for more documentation. This will delay the time of your application getting approved.
5. Keep Your Credit Card Account Open
After you receive approval for the loan, you should not close down your credit card account. Closing your account may leave a negative impact on the credit utilization ratio and credit score. However, if you can’t control yourself from not using the credit card, it will be best for you to close down the credit card account. If you decide to continue using your credit card, the golden rule is to not spend more than your means.