Most people choose to consolidate loans in order to eliminate multiple payments and reduce overall interest. By combining two or more loans, borrowers can lower monthly expenses and potentially improve personal credit scores. In order to consolidate loans, borrowers must possess a good credit score and a history of consistently paying debts on time.
Before making a final decision to consolidate loans, borrowers should take time to conduct research and compare loan consolidation lenders and applicable rates. Additionally, borrowers should obtain credit reports from each of the credit reporting bureaus. Banks have tightened lending criteria and rarely allow borrowers enter into loan consolidation if they have low FICO scores or attached liens or judgments.
Several options exist for obtaining current credit reports. The most economical choice for obtaining credit reports is through AnnualCreditReport.com. Backed by Experian, Equifax and Trans Union, this website allows borrowers to obtain a complementary report from each credit bureau annually.
Other options include ordering a report from each credit bureau or subscribing to credit monitoring services. Companies such as FreeCreditReport.com, CreditReport.com and Credit.com offer updated reports on a monthly basis, along with providing FICO scores. Many credit card companies also offer credit monitoring services to help consumers stay abreast of changes made to credit reports or FICO scores.
If incorrect or derogatory information is listed on credit reports, borrowers should submit online dispute reports to each credit bureau. If FICO scores fall below 720, borrowers should engage in credit repair activities to improve their score prior to applying for debt consolidation loans. Otherwise, borrowers could end up paying substantially higher interest and defeat the purpose of reducing overall debts.
Most types of loans can be consolidated including home mortgages, college loans, car loans, unsecured loans such as credit cards, and various types of secured loans. Many debt consolidation loans are home equity loans which require using real estate as collateral. In order to obtain a home equity loan, borrowers must have sufficient home equity and good credit history.
Another type of home equity loan is a home equity line of credit. HELOC loans provide borrowers with an established amount of credit. Interest is only charged against funds withdrawn from the account. For example, borrowers are extended $50,000 and use $15,000 to consolidate loans. Interest is only assessed against the $15,000.
Home equity loans are charged a lower rate of interest than other types of loans and can save borrowers thousands of dollars in interest alone. However, home equity loans can place your home at risk for foreclosure when borrowers default on payments. Therefore, careful consideration should be given to using home equity to consolidate unsecured loans.
Loan consolidation can provide financial relief, but can also lead to additional problems if borrowers do not engage in due diligence. The Internet provides a wealth of resources to help consumers determine the best strategies for their personal finance situation.
We invite you to discover additional debt reduction options and loan consolidation resources in our get out of debt article library. Take a moment to subscribe to our mailing list to receive additional money management strategies and learn how to begin saving for your future.
Published on May 21, 2010 at 02:32 AM