Debt consolidation — the two words sound like the answer to a prayer. It seems so simple: Collect all your individual debts into one lump-sum loan and you’ll have just one low, easy-to-manage monthly payment. But before you pick up the phone and make the call, ensure that you follow these steps.
1. Collect your information
Sit down and make a complete list of all your current debts, but do keep in mind that not all debts qualify for consolidation. According to the Office of Consumer Affairs, mortgages are not counted toward your debt load for consolidation purposes.
When you meet with a loan officer, he or she will have access to all your financial information in order to determine whether you qualify for a consolidation loan.
2. Check your credit rating
Getting approved for a debt consolidation loan isn’t just a matter of walking into a financial institution and asking nicely. If your credit rating isn’t the best, it will be harder for you to obtain a loan.
Remember, you’re taking out one big loan to cover all your debt. Lending institutions need proof that you will be able to make the monthly payments.
3. Research your loan options
Don’t sign with the first institution you go to. Research your options and find out which financial institution will offer you the best interest rate and loan terms. Start with your bank, then check their competitors and credit unions.
4. Get rid of temptation
Cut up the credit cards and delete anything that could tempt you to spend beyond your means. If your bad financial habits are still hanging around, you might find yourself in a worse situation than where you started — with one big debt and new debt payments on top of it.
Getting a consolidated loan is not just so you only have to pay once a month. What it offers is a chance to pay off your entire debt at a lower interest rate. That means you can put down more than the minimum monthly payment and pay the whole amount off faster, leaving you debt free — which is the ultimate goal.