Personal Loans for Debt Consolidation

Debt has a bad reputation for ruining lives, prompting many to form a debt-free goal. Rather than paying off each credit account individually, consumers favor using personal loans for debt consolidation to cut interest payments. This is a solid debt repayment strategy, unless you fall into the common debt consolidation traps. Using personal loans can alleviate some of the pitfalls, but you must be cognizant of others.

Debt Consolidation Trap #1: Transfer Fees

Some lenders, usually credit card companies, charge balance transfer fees when you consolidate to their product. Using personal loans for debt consolidation is one way around this because personal loan lenders may not charge this kind of fee. Always read your fine print to ensure you don’t rack up unexpected charges. Otherwise, transferring balances to your new lower interest rate will not save you as much money as you thought.

Debt Consolidation Trap #2: Creating New Debt

No one can know exactly what curve balls life has in store, which is the reason so many individuals incur debt in the first place. This fact makes credit cards an attractive safety net to those without ample funds set aside in an emergency savings account. The problem with this plan is that it’s easy to charge cards back up to pre-consolidation levels after you use a personal loan to consolidate debt. If you aren’t careful about changing your spending and saving habits, you’ll end up with the same debt payments you had before, plus the consolidation payment.

Debt Consolidation Trap #3: Consolidation Payments

Lowering your interest rates through debt consolidation loans makes good financial sense when you do the math. It doesn’t, however, always equate to good cash flow sense. Where you once had small payments scattered throughout your month, you now have one large payment due. In some cases, your personal loan payment will exceed what you bring home in a week. If this is the case, you must develop a budget that allows you to save a portion from each paycheck to make your payment. If your lender has the contractual option of raising your interest rate over late payments, you may end up in a worse financial position than you were in before consolidating your debt. Even if they don’t change your interest rate, you’ll pay a substantial amount in late fees and your lender will report a poor payment history to credit bureaus.

As long as you carefully read your lending agreement and are diligent about changing your spending habits, personal loans for debt consolidation purposes will save you money while you whittle away at your debt.

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Personal Loan Rates

Searching for the perfect loan option for you often means comparing the rates of competing lenders. You understand how the interest rate charged affects your payments and know it’s important to find the lowest personal loan rates available. What you may not know is exactly how lenders determine the interest rate they charge to lend you money.

Lenders use the following factors to set personal loan rates:

• Credit history
• Collateral
• Loan type
• Loan terms

Credit History

Reviewing your credit file gives lenders a good idea of how reliable you are to repay the loan. Generally, the closer you are to the perfect credit score of 850, the lower the rates you’ll enjoy as a result. Lenders sometimes tier personal loan rates based on credit score, so if you can maintain a score in the 700s, you should still receive a low rate.

Collateral

It’s no secret that lenders are more willing to take risks by giving loans to individuals with shaky credit when they have collateral. Collateral for a personal loan can be anything from a house to a car to stock certificates. Keep in mind that your collateral must have a tangible resale value in order to be accepted by lenders. Family heirlooms may have sentimental value to you, but banks won’t accept them unless they can be quickly sold for cash.

Loan Type

The type of loan you choose will often play a major role in the lender’s rate. Payday loans, for instance, carry some of the highest personal loan rates in the industry because of their extremely short terms. On the other hand, home equity loans maintain lower rates with possible tax advantages due to the nature of the collateral. If multiple types of loans will suit your purpose, make sure to compare rates between types, as well as lenders.

Loan Terms

The length of time you want to repay the money and your loan amount play a role in the interest rate with many lenders. Although all loans constitute income to financial institutions, they make the bulk of their profit from the larger loans amounts. If you lender uses the loan amount to determine your rate, ask how much more you must borrow to get a rate discount. Also, remember that the longer you take to repay the loan, the riskier it is for your lender that you’ll default on the loan. If you can afford higher payments, you may save on interest by shortening your loan’s term.

Every lender uses a different method to set personal loan rates, but if you remember these four key elements, you can find the lowest possible rate.

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Personal Loan Rate Basics

When you’re ready to apply for a loan, it’s important to know how your lender sets the personal loan rate they offer you. This is not an arbitrary number selected on a whim, but the sum of careful calculations they do concerning the nature of their business and how you fit into it. Knowing how they set the rate can help you to maximize your chances of getting the lowest interest rate possible.

Banking Industry Factors

Sometimes, the personal loan rate your financial institution offers to you has little to do with your creditworthiness. Industry factors play a large role in most service oriented businesses, but this is especially the case with financial companies. When the industry faces uncertain times, you’ll notice it in bank interest rates.

For example, a higher than normal percentage of defaulting mortgages causes a ripple effect through the financial industry because many banks are also in the home loan business. When one business unit takes a loss, the whole company must look for ways to cover these losses before shareholders hold them accountable for a decreasing stock value. Offering loans is the primary way banks make money, so increasing the personal loan rate is their best chance for additional profits until they can sell off their bad assets.

Personal Credit Factors

When market forces are not in play with the personal loan rate, your credit is the single largest factor determining what rate you receive. In general, the higher your credit score, the lower the interest rate on your personal loan. When you wish to obtain the low advertised rate of a lender, remember that good credit is not always enough. Within the fine print, the lender may stipulate the rate requires credit qualification. This can equate to scores hovering near perfect, not just above average.

Loan Amount Factors

If everything in your credit is top notch and the industry as a whole is without scandal, it doesn’t always make immediate sense why you did not get the interest rate you deserve. Rather than reflecting on you, your personal loan rate might be a reflection of the loan amount. It’s no secret that larger loans generate more profit for financial institutions than small dollar deals. You can ask your lender if increasing your loan amount will qualify you for a better interest rate, but know that the bank threshold may be beyond your reach, perhaps as high as $50,000 for a personal unsecured loan. In this case, the offered rate is the best deal for your loan amount.

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Personal Loan Options

If you’re thinking about applying for a personal loan, you have a lot to consider. Under the umbrella of personal loans, you’ll find a variety of loan options, all with individual terms and nuances. Before you apply for any loan, find out about the different types available to you in various situations to determine which is right for you.

“I want a car.”

Getting a personal loan to buy a car is a relatively easy matter. In most cases, you go to the dealership to browse the selection and drive away in your new car with dealer financing. Because dealerships don’t make a dime until the car drives off the lot, they make a wide range of lending options available to customers to expedite the process. Whether you select the standard auto loan, lease or balloon payment option, your auto dealer is not your only lending source.

Banks and credit unions offer vehicle purchase loans, although they do not always advertise the fact. If you have a solid credit history, you can get a personal loan from your financial institution using your new car as collateral. You can also refinance the loan you get at the dealership to your bank at a later time.

“I want a house.”

A mortgage is your best personal loan option for home purchase. Extended terms of 30 years create budget-friendly payments for this hefty purchase. Mortgage lenders determine approval based on your loan size, credit score and income; however, bad credit mortgage options exist if you’re willing to pay higher origination fees and interest rates.

When you want to design and build your house instead of purchasing within a housing community, you’ll need land. Lot loans are special personal loans that allow you to buy your land separate from your builder. You then roll the lot loan into your mortgage when it’s time to close the deal.

“I want to consolidate my debt.”

Debt consolidation is a hot topic among consumers looking for ways out of debt. If your credit is strong, an unsecured personal loan is an option to help lower your interest rate and payments. Homeowners who owe less than their home is worth have an additional option for debt consolidation in the form of home equity loans. Rates are typically lower than unsecured loan rates, but every state has different guidelines for equity lending. Talk to your lender to explore this option.

Every financial institution offers different personal loan products, so it’s smart to talk to multiple lenders about what they offer early in your decision-making process.

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Personal Loan Comparison Tips

Selecting the correct loan to meet your needs is about more than just the rate of interest you pay for the deal. By performing a personal loan comparison on the primary four components of your loan, you can determine which loan is the clear choice for you. Without performing a side-by-side comparison, you risk passing on the personal loans that can save you the most money.

Personal Loan Comparison 1: Interest Rate

Although the interest rate is not the only area you should focus on during your personal loan comparison, it is an appropriate place to start. When you’re considering a short-term loan against a long-term loan, be sure to find out what rate of interest the short-term personal loan charges on an annual basis. Once you do the math on your 90-day loan, you may discover an interest rate in excess of 100 percent. Note this on your comparison and continue your analysis of your loan options.

Personal Loan Comparison 2: Loan Term

In general, higher loan amounts come with longer loan terms. When performing your personal loan comparison, you must keep in mind what your goal is with obtaining the loan. Extended terms on personal loans yield lower monthly payments, but mean paying more in interest over the life of the loan. An extended term can also provide you more flexibility if you plan to use an annual bonus or income tax refund to repay a large portion at once.

Personal Loan Comparison 3: Monthly Payments

Accepting the lowest payment option is a natural reaction, but take a deeper look at the personal loans. Your personal loan comparison will show you why the loan has such a reasonable monthly payment. Low payments because of low interest rates are often a good deal, while low payments due to lengthy terms mean paying more money to the lender. If both personal loans have monthly payments you can afford, consider the loan with the higher payments if the rest of the terms are more favorable.

Personal Loan Comparison 4: Total Interest

For many experienced borrowers, the total interest they pay is of critical concern during the personal loan comparison process. Assuming you never make extra payments or late payments, the amount of interest on the contract is the exact amount you’ll pay. Depending on the term and amount of the personal loan, the interest you pay may exceed the amount you borrow. If cutting the total interest is important to you, seek lenders who do not charge a prepayment penalty, allowing you to pay additional principal on the loan at any time
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