Debt consolidation is a crucial financial tool for people struggling with multiple high interest debts. It helps them simplify their finances by combining all debts into one. After consolidation, you’ll be left with only a single monthly payment and a single fixed interest rate to worry about. What’s best is that you can easily secure a consolidation loan from banks, credit unions and online lenders. The most common option people often turn towards are banks. You might wonder, which banks offer the best consolidation loans and what is their eligibility criteria? Well, each lender has different criteria and not all consolidation loans are created equal.
Whether you are applying for a loan from a bank, credit union or any online lender, it’s important that you first read the fine print before signing up. You should understand the loan terms and ensure that they align well with your financial goals.
Here are the top 5 most important questions one must ask before taking a debt consolidation loan;
1-What Is The Interest Rate And Is It Fixed Or Variable?
One of the most important factors that determine how much your loan will cost you over time is the interest rate. Each lender will offer you a different interest rate based on your credit score, employment and income.
Fixed Vs Variable Interest Rate:
- A fixed interest rate of course is the better option as the rates will stay the same throughout the life of the loan and it’ll help you easily predict the total amount you owe.
- Variable interest rates keep on fluctuating as per the condition of the market. Initially, you might see yourself saving some money but in the long run, the fluctuation can cost you more than what you expected.
Why Does Interest Rate Matter?
A 2% or 3% difference in the interest rate might seem insignificant but in the long run it really does matter and it can add up to hundreds and thousands of dollars over the life of your loan.
It’s important to ask your lender about the APR and not just the interest rate. The APR includes the interest rate and certain fees as well. This will help you get a clearer picture of how much you’ll owe in the long run.
2-What Fees Are Associated With The Loan?
When signing up for a consolidation loan, people often overlook other fees involved that can literally eat up all your savings you expect after consolidation. Some common fees include;
- Origination Fees: A certain percentage that lies between 1% to 8% that’s deducted from your loan before you receive the funds.
- Late Payment Fees: In case you miss a payment or pay late, the lender will charge you a late payment fee accordingly.
- Application Fees: Some lenders might even charge you an application fee to process your loan request.
- Prepayment Fees: The lender will charge you with a penalty in case you want to pay off your loan early.
You must inquire about all these additional charges because sometimes, even if you secure a low interest loan, a high upfront fee can end up costing you more than a high interest rate with minimal fees.
It’s also important to request the lender for a fee disclosure sheet. This will help you compare different lenders and their offers in more detail.
3-What Are The Loan Terms?
The “loan term” refers to the time within which you’ll have to repay the loan. It’s important because not only will it affect your total monthly payment but it’ll also determine how much interest you’ll pay. For example,
- In case of a shorter term you’ll have to make higher monthly payments but less interest.
- In case of a longer term you’ll have to make minimum monthly payments but more interest in total over the life of the loan.
A lender may offer you a longer term where you’ll have to make minimum monthly payments and it might seem like an attractive deal to you but in the longer run, you’ll be paying a lot more interest than you have to.
4-What Repayment Options Are Available?
Always go for the lender that offers flexibility in repayment of the loan. The more flexible the terms are, the easier it’ll be for you to manage your finances more effectively. Especially if you don’t have a stable income then you must ask about the possible repayment options for your ease.
You must ask about;
- Automatic Payment Discounts: Mostly banks offer 0.25–0.5% rate discounts in case you set up an autopay.
- Payment Frequency: Ask the lender about monthly or biweekly options for your convenience.
- Hardship Programs: Ask the lender if they offer any hardship programs in case you face an emergency or lose your job etc.
- Prepayment Penalty: Inquire about any prepayment penalty in case you want to make extra payments when you can.
To end up with the right lender and the right loan terms, it’s important to do proper research and compare different options. Go for the one that offers flexible repayment terms to make your debt payoff journey easier and smoother without any risk of default.
5-What About Early Payoff Penalties?
It’s great if you want to pay off your loan earlier than the decided loan term because it can save you a lot on the interest rate. However, it’s only beneficial if the lender doesn’t penalize you for it.
Prepayment Penalty: Some lenders do charge a certain fee (a percentage of the outstanding balance or a few months of interest) in case you want to pay off your loan early. You must ask about these penalties before signing up for the loan to be clear. If a lender hesitates when answering this question, consider it a red flag and look for other options.
Final Thoughts
There’s nothing better than debt consolidation if you want to simplify your finances and manage your debt. However, to ensure a smooth and seamless debt payoff journey, it’s important to first understand the loan terms in detail. Before you sign up to any agreement, you must ask the lender the above-mentioned 5 questions to ensure that the loan will help you resolve your financial issues without any hassle or hurdle. What’s more important is that you should never rush the decision and always take your time to compare different lenders first.
Remember that your goal isn’t just to consolidate your debt, in fact, you have to figure out a way to eliminate it efficiently and effectively. So you must choose your lender wisely and ensure that you’ve read and understood the fine print in detail.
FAQs
Q1. Is It Better To Get A Debt Consolidation Loan From A Bank Or An Online Lender?
There’s no one right answer that fits all. In fact, it depends on your financial situation and your credit profile. For example, if you have a strong credit profile with a stable income then you should opt for banks as they offer better loan terms and lower interest rates to their existing customers. On the other hand, if you want faster approvals and flexible lending criteria then online lenders are the better option. You should always compare different lenders, interest rates and their loan terms to make the right decision.
Q2. Is It Possible To Consolidate Both Secured And Unsecured Debt?
Most of the debt consolidation loans are unsecured which means that they don’t require any collateral and you can use the funds to consolidate your unsecured debt easily. On the other hand if you want to consolidate secured debt that’s backed by a collateral like a vehicle or a property etc then you’d need to apply for a secured consolidation loan that would require a collateral.
Q3. Can I Pay A Debt Consolidation Loan Early?
Yes, you can pay off your debt consolidation loan earlier than the decided term however, this is something you should first check with your lender. Some lenders charge prepayment penalties in case you want to pay off the loan early. If it’s possible, you should choose a lender that accepts early repayment without charging you any extra cost.
Looking for clear answers and proper guidance on how and where to get debt consolidation loans that fit your financial picture? Try talking to our experts at Mountains Debt Relief to make your debt pay off journey easier.