Are your installments too high lately? Or do you expect them to go up? Has your FICO score improved enough so that you may be eligible for a loan with better conditions? Do you want to switch to a different type of loan?
The answers to these questions will affect your decision to consolidate a loan. There are several benefits to debt consolidation, including lower the borrower’s total monthly installments and simple loan repayment timelines, among others. But along with the potential benefits, it has downsides, too. If you have federal student debt, the U.S. Department of Education will help you determine whether it is worthwhile to consolidate.
And remember, just because you are eligible to consolidate does not necessarily mean that you should. The question remains: is it a smart tool to consolidate a personal allowance? Find out when it is (and is not) appropriate to do so.
When to Consolidate a Loan
You may be interested in your debt consolidation for a great number of reasons, in which it may be possible to obtain potential savings https://filld.com/same-day-loans-vs-credit-cards-which-is-better/. But ideally, it would be to achieve a new type of loan that comes with better APRs as a part of the procedure. That is the first reason why you might want to consolidate. Here are some other scenarios when consolidation is appropriate.
When Your Credit is Better
Since the interest rate on your loan is significantly tied to your credit score, higher rates typically mean lower APRs. To put it differently, you might be able to get a reduced interest rate because your FICO score has increased since you initially got your current loan. And this could be a great reason to consolidate.
For instance, let’s compare the monthly installments on a 2-year personal loan of $5,000 at 10.5% and 7.0%. Your estimated monthly installments will be $232 and $224. Even if the difference each month is not so critical, it will add up to $193 over a year.
When You Want to Change Your Rate Type
If you have a variable-rate personal loan, your installments will change as the interest changes. As a result, your repayments could float depending on the timeline. It is impossible to be stress-free with the prospect that your regular payments could take an upward trend and you end up paying more.
By consolidating, you can switch from an adjustable to a fixed rate to give yourself some ease of mind by having consistent payment amounts and interest rates each month.
When Your Income Decreased
If you have reduced your income or even have lost your job, you may want to switch to lower payments. This way, you may be looking to switch your existing debt for a longer loan term https://filld.com/5-reasons-you-might-want-to-take-out-a-payday-loan/, which can cost you more in the long run but could dramatically help reduce the number of payments you should pay regularly.
When You Could Afford The Charges
Consolidation may remind you of what you went through in taking out your first loan, since you may encounter many of the same processes and the same types of costs this time, too. This may include origination or application charges, as well as a prepayment penalty if you repay your principal before the period expires. Before applying for a new loan, make sure that consolidating is still a profitable idea after factoring in charges.
When to Avoid Consolidating a Loan
There are times when it’s better to refuse from consolidating your existing loan. Before you decide, consider whether any of these scenarios apply.
When Your Credit is Poor
If you do not have a good or excellent credit score, avoid this option at all costs, since many financial institutions will not provide you with this option or will provide you with very high-interest rates. Instead of piling up more charges, work on paying off the debt regularly and building your credit at the same time.
When Your APR would be Higher
If you’re not getting a more favorable APR by consolidating your amount, weigh all the benefits and drawbacks carefully about whether you should apply. Try to never accept conditions that do not improve your financial situation. To put it differently, if the new lending provider offers you rates that do not favor you and do not get out of the problem, do not accept them.