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You think debt consolidation could be an antidote to your seemingly never-ending credit card woes, but you wonder how you can snag the best rate on a loan.
Well, here’s how to get the best credit card consolidation loan rates.
Just What Is Debt Consolidation?
There are a few ways to consolidate debt, but in this case, it’s taking out a personal loan to cover multiple unsecured debts – usually high-interest credit card obligations. The monthly payment is fixed, so you needn’t worry about keeping track of various amounts. And, it’s just one payment to make each month.
But to make it all work, the loan’s interest rate must be less than what you’re paying aggregately on your current debt, the potential for which depends on a few factors.
What’s the Big Deal About Loan Rates?
Basically, interest is what you fork over for the ability to borrow. So, if a bank lends you $1,000 at a 6% annual interest rate, you’ll pay a total of $1060 to repay the loan over 12 months.
However, instead of simple interest, as cited above, credit card debt carries compound interest, meaning you pay interest on the accumulated interest. The rate at which the debt grows depends on how frequently the loan comes due – usually monthly with credit cards. As a result, you can run up some big numbers if you’re just making minimum or small payments.
What Determines Your Loan Rate?
Getting the best credit card consolidation loan rates hinges largely on your credit score and debt-to-income ratio – the percentage of your monthly gross income that goes toward paying debts. A lender wants to see you’re able to manage loan repayment, so most of them look for a debt-to-income ratio of 36% or less.
Typically, debt consolidation loan rates range from 6% to 36%. Procurement of one of the lower-end rates requires an excellent credit score of between 720 and 850 FICO). Still, if you have a good score – 690 to 719 FICO – you can likely get a better rate than what you’re paying now. Most consumers having trouble with plastic are paying an interest rate of about 25%.
When mulling loan offers, be sure to factor in the new term as well as the interest rate. While a longer long term gets you smaller monthly payments, you could wind up paying more interest over the long haul. The quicker you pay off the loan, the more you’ll save on interest.
How Can I Get a Lower Rate?
The No. 1 way is to – you guessed it – improve your credit score. Doing so may also make you eligible for other kinds of low-interest loans. It may take several months to shine up your score, but you should do so if you can.
Get a free copy of your credit report, which will contain information you should check for errors. Clearing them up will get you an uptick, which could be just enough to bump into a better interest rate. Perhaps there’s a smallish debt on your report that you could pay off right away. In any case, it’s important to know where your credit stands.
Note that the score you get is not the exact same figure lenders receive, but it’ll come close enough to let you know whether you are in the poor, fair, good, or excellent category and determine a good idea of your ultimate rate.
So, consolidating your debt with a personal loan can simplify your debt payoff experience, as well as save you cash when you nab a better rate. Now that you know how to get the best credit card consolidation loan rate, you can put yourself solidly on the road to financial recovery.