Let’s say you have an existing debt in your bank account. After several months of repaying the principal, you have realized that your current APR or other loan terms are not so appealing anymore. This may be aggravating. But a personal loan consolidation gives you the potential to fix it.
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Consolidating a loan is a process that lets you change the current conditions of a loan with a new source of financing that potentially has a lower APR or revised repayment period. This might be a good idea of reducing the amount of interest or decreasing the value of the installments. Let’s look more closely at what you can expect from a personal loan consolidation.
How does Consolidation Work?
Before considering a consolidation, you will need to understand all that it involves. When you consolidate, you simply apply for a new source of financing – either with the same lending provider (novation) or a different one (subrogation) https://filld.com/same-day-loans-vs-credit-cards-which-is-better/ – and then use the money you receive to repay your existing debts.
While a loan consolidation could provide added convenience and get you a better interest on your repayment, ultimately, extending your existing debt period may streamline your finances, but the strategy probably will not fix underlying financial challenges. Chances are you will pay more toward the debt overall by extending the repayment due to fee charges. That’s why it is important to pay off the principal as soon as possible.
How to Consolidate a Personal Loan
Once you decide to consolidate your loan, check the following steps to move forward with your final decision.
1. Determine the Amount
As we have said earlier, the reason for consolidation is in paying off the existing debts with a new loan that has different (better) conditions. Thus, before you shop around for available options, figure out the exact amount of funds required to repay your old loan. Also, learn about prepayment penalties that your lending provider charges (if any), as they may outweigh the advantages of consolidation.
2. Find Out About Your Credit
Before applying, it is crucial to make sure that details in your credit report are accurate. This step is important to understand whether you are eligible to qualify for a more appealing rate than what you are currently repaying https://filld.com/the-best-strategy-to-pay-off-current-payday-loan-debts/ . If you see that the new interest is not significantly different, then it may not be a smart idea to consolidate.
To gauge your credit score, start by getting copies of your credit reports to make sure the info in them is accurate (go to the FTC’s website for information about free copies of your report). You can also check if your financial institution provides this info for free to their members.
3. Research the Different Options
If you’re planning to consolidate, you need to research different lenders and review their interests, deadlines, and conditions, among other important info. Shopping around for a loan will help you take the best deal and then make the application. Comparing and negotiating may save you hundreds of bucks.
That said, remember that it may be unwise to extend the period of your existing loan if:
- consolidating costs additional charges;
- consolidating changes the conditions of the loan;
- you pay more in fees for consolidation;
- you are not looking for lower installments;
- your current debt has a prepayment penalty.
All of these scenarios should be considered when determining if a debt consolidation makes sense.
4. Talk to Your Issuer
If you are considering consolidation, you may begin with your lending provider. That company may be willing to keep your business by offering you a better deal or eliminating some of the standard consolidating charges. So, talk to your credit issuer to inform them that you are planning to consolidate your existing debt. Again, let them know that you are shopping around for the best deal.
5. Apply for the New Option
When you have chosen a company whose offer you like most, don’t hurry up to submit your application. Remember that the comparison step mentioned above is different from an official application. To move forward with an offer, carefully read the terms of the loan, including the underwriting process and fine print, among others.
If you are satisfied with the T&Cs, you may officially move forward with your application. Keep in mind that all these financial services have required paperwork to validate your application. This could include your SSN, proof of address, current official identification, pay stubs, or tax documents.
