One of the ways that you can increase the efficiency of your debt repayment plan is to consolidate your debt. A debt consolidation loan basically means that you are taking out one big loan to pay off two or more smaller loans. With a debt consolidation loan, you usually end up with one loan payment, instead of multiple payments, and only one interest rate. This convenience is what many people consider when getting a debt consolidation loan.
Checking Your Credit
The first thing you need to do is know what kind of credit you have. You can look at your credit report for free, once a year, from each of the three major bureaus. Unfortunately, you will have to pay to look at your credit score. (If you are turned down after July 21, you get access to the free score that was used to reject your application.) You have a better chance of qualifying for better terms if you have good credit.
How Much Can You Borrow?
Next, you need to figure out how much you can borrow. Many people choose to use a home equity loan or a second mortgage to consolidate debt. If you have equity in your home, you might be able to get a tax break for the interest you pay, and a better rate. However, you are putting your home at risk, and you could end up losing your home because now you’ve taken unsecured debt and secured it with your house.
Another option is to consider a P2P loan. If you can show that you are trying to get back on your feet, you might be able to convince some of your peers (who want some passive income) to pitch in and provide you with an unsecured P2P loan from a place like LendingClub or Prosper.
Which Loans Will You Consolidate?
Once you know how much you will be able to borrow, it’s time to decide which loans to consolidate. Prioritize your loans according to balance, interest rate and other factors. If you are approved for a lower interest rate, paying off the loans with the highest rates first is a good idea.
If you are going through a mortgage lender, using a home equity loan, chances are that your lender will pay off the selected loans automatically. If you receive money from another source, you may need to make sure that you make the payments on your own. It does no good if you just add more debt.