When looking for debt consolidation loans, it’s important to take a look at lenders offering fixed interest rates, reasonable APRs, and no hidden fees. These three factors should be in your mind as you analyze online and in-house lenders’ offers.
This is a process that will take only a few minutes to accomplish. Of course, these factors may change once you actually fill out a debt consolidation application and the rates and terms are applied to your credit score, income, and other factors affecting the outcome of your pre-approval application with a local or online lender. The good news is that you can compare lenders’ offers specifically tailored to you without impacting your credit score. Most banks will accept credit scores of 640 and up for loan amounts ranging between $2,000 and $40,000 and their APR scales between 5.99% to 35.99%. Keep in mind that the higher your credit score, the lower your APR and the more leverage you will have to negotiate the terms of the loan with lenders.
If you have a hard time making payments on time due to the number of outstanding credit accounts you have, or if your interest rates are so high that your chance of paying off the debt is going to take forever, consolidation may be the answer to your woes. The best debt consolidation loans offer a lower interest rate than what you are currently paying and allow you to become debt free in 2 to 7 years.
However, the scenario depends on your personal financial history as a debtor. It is important that you shop around and apply with several lenders to compare which terms and conditions are the best for your unique situation. Lending institutions use their own mathematical equations called algorithms to calculate the interest rate they will offer you. They will perform a soft pull on your credit without affecting it, and in 3 to 5 minutes you will have the pre-approval rates that apply to you.
You must know that there is no real difference between a consolidation loan and a personal loan. The term “consolidation loan” is used by banks and lending companies to signify the way the loan will be used for marketing purposes. Personal unsecured loans have the highest risk factor for lenders because they do not require any collateral recourse as secured loans do. In most cases, banks require you to be an account holder with them before they consider giving you a loan. Online lenders are more flexible. Their sole purpose is to give you a loan, so the process is much faster and more lenient.
Whether a credit union, bank, or online lender, each institution has its own set of rules when it comes to lending terms. There is no one for all -so it’s up to your credit history to leverage your terms with each depending on your financial situation. There are two types of charges that constitute the major factors involved in a consolidation loan, the APR and the origination fees. These always fall within a given range for each lender, and the percentages they offer you depends on your credit score and other personal history factors such as employment status and the cost of living in the area where you live. In some cases, a bank or lending institution whether online or in-house may have a higher range of APR percentage but will give you better loan terms than one with a lower range. Shopping around will let you tap into several scenarios to choose the best for you. Most lenders fall within the 5% to 40% APR range.
Of course, the better your credit history, the lower the APR offer that you will receive, but even one percentage point makes a difference in the overall picture of the life of the loan, so shopping around is crucial.
The second major factor to consider when applying for a loan is the loan origination fees. When it comes to debt consolidation, the origination fees the lender charges vary considerably. These are administrative fees the lending institution wants you to pay for setting up the loan. As with APR, the best and most common origination fees are on a percentage scale ranging from 0% to 6%. However, very few banks do not charge origination fees. A higher origination fee does not necessarily mean you will get a higher APR also. But it is best to cap it at 6%, anything over that would be considered uncommon for an origination fee.
When considering the factors mentioned so far, one more thing comes to play a big role in the terms of the loan, whether the interest rates are fixed or variable. Your best option would be a fixed interest rate because they will not fluctuate during the life of the loan so your monthly payments will remain the same. There is risk involved with variable rates which may start low but are unpredictable, and although they are usually capped, they may rise from 6 to 15 percent which is a big difference that will affect your monthly payments and the total amount you will end up paying. It is safer to have a predictable loan where there will be no surprises.
Some lenders may offer both options. Make sure that when you shop around and compare interest rates, you are comparing fixed to fixed and variable to the variable because this makes a big difference.
Repayment plans also differ greatly from lender to lender on a scale. While there is no ideal loan amount or payment plan that will fit everybody’s needs for a consolidation loan. Most lenders do not offer very low loan amounts of $2,000 or below. Most lenders offer loans depending on the amount of money you make monthly, and everything falls into perspective from that figure. If you make $2,000 a month a loan amount of $20,00 may seem like you’ll never be able to pay it off. But if your monthly income is $10,000, it is the $100,000 loan that will seem impossible to pay off.
The best debt consolidation loans fall within two or three different types of repayment period plans. The most important factors to consider is whether you can afford the monthly payments and the total amount you will end up paying by the end of the loan period depending on your APR and any other fee schedule.
Some fees may be hidden or not, reasonable or not. Besides the cost of the APR and the loan origination fees, there are smaller fees that you need to be aware of. Every lender is different, but you should look for transparency and fairness. These fees include late or unsuccessful payment fees. It’s only fair that if you are borrowing money from someone and you agree to pay them back on a given schedule, that you should be responsible for penalties when there is a problem, and you fail to make the payment on time or all together. Some fees are flat and others are a percentage of the loan amount. This is the tricky part. Pay attention to the terms of these fees for they can make a huge difference in the overall amount of money you end up paying since they can be added to your principal and accrue interest. Sometimes the fees can be, for example, the lesser of 5% of the payment due of X amount of dollars.