Have You Been Thinking About Getting a Debt Consolidation Loan?
People take out debt consolidation loans because they believe that their debt will become more manageable. To an extent, this is because it is much easier to keep track of a single debt than multiple debts. However, the main appeal is the promise of a lower interest rate. As a result, if people are wondering, “How important is a debt consolidation loan interest rate?” They should know that the answer is, “Extremely important, so much so that it could be considered the single most important element.”
Why Is the Interest Rate on a Debt Consolidation Loan So Important?
A higher interest rate means that more interest will be charged on the principal in each period. In turn, this means that more of the payment in each period will be used to pay the interest rather than the principal. This extends the length of the loan, thus making for a much bigger cost in the long run.
Based on this, it should be clear that people need the lowest interest rate possible to make a debt consolidation loan worthwhile. The problem is that lenders charge interest rates based on what is profitable for them, which takes into consideration the level of risk for them.
If a loan is high-risk, they will charge a higher interest rate to make it worthwhile for them. In contrast, if a loan is low-risk, they will charge a lower interest rate to make it worthwhile for them while bringing in more interested individuals than otherwise possible.
Tactics for Lowering Your Rate
With that in mind, those seeking a low-interest debt consolidation loan should prepare by making themselves as low-risk as possible. One way to do this is with the use of collateral. This lowers the lender’s risk because it affords the creditor something upon which to fall back if the borrower becomes incapable of meeting their debt obligations. Bear in mind however, you could be forced to sell your home if you cannot pay off the loan.
Another workable strategy is finding a co-signor with better credit than yours to guarantee the loan. Again though, if something goes sideways, you’ll risk losing your positive relationship with that person. After all, they’ll have to pay off the loan if you default.
For this reason, you should put the bulk of your effort into presenting the highest credit score possible. That is the single most popular measurement of creditworthiness and the best way to get a favorable debt consolidation loan interest rate.
How Credit Scores Are Calculated
The exact way credit scores are calculated hasn’t been revealed to the public. Still though, the relevant factors and their weighting have been public knowledge for a very long time.
First, there is payment history, which has 35 percent weight. This is focused on how good someone has been at fulfilling their debt obligations, so it covers questions such as whether they have been making their payments on time and whether they have ever had one of their debts sent to collections.
Second, there is the outstanding balance, which has 30 percent weight. This matters because a lot of debt can make it difficult for someone to manage the financial burden of adding more.
Third, there is the length of credit history, which has 15 percent weight. Simply put, longer credit histories say borrowers are more reliable because there is more information for interested parties to review to form a sound judgment.
Fourth, there are the different kinds of credit being used, which has 10 percent weight. Being able to manage a wider range of debt shows greater financial mastery.
Fifth, is the number of hard inquiries in recent times, which has 10 percent weight. In this case, this is important because a sudden rush of hard inquiries in short succession could suggest financial distress. People who want a strong debt consolidation loan should work on these five factors to make themselves look better to their potential lenders.
Further Considerations
So, how important is a debt consolidation loan interest rate?” Well, given it’s a key aspect of coming out ahead with a debt consolidation, it’s very important indeed.
