Getting A Personal Loan To Pay Off Bills: What You Need To Get Approved

June 10th, 2009

Is it ever right to get a loan to pay off bills? While some people will (rightfully) say that a loan can hardly be the solution for other loans, but as is the case with many financial decisions, it really depends on the specifics of the person’s situation. In any case, an informed customer is better prepared to make the right decision than an ill-informed one. With that in mind, I’ll try to present both sides of the coin, and hopefully it will make the decision making process smoother, and more financially accurate.

The reasoning behind debt consolidation is that you get to wrap up all your bills into one single obligation, at a lower interest rate, which lowers your monthly obligations. You pay less in interest over the term of your loan, and are this able to pay down the principal more quickly because a greater portion of your payment goes toward bringing down your debt as opposed to paying for interest. But once you do get a loan to pay off your bills or to get out of excessive credit card debt, it’s critical that you change your spending habits for the better, otherwise you’ll find yourself in even worse shape a few years down the road.

Loan to consolidate your bills: how to get it approved

If carried out properly, using a personal loan to consolidate your bills and credit card debt can be an effective way to get a good grip on your finances and get out of debt. This means that when considering options for consolidating debt, you should be careful, namely by making sure that the terms you’ll get on the personal loan terms will be better than what you presently have. As a rule, you should try and avoid longer terms than what your current bills have; and please don’t get the new loan at a higher interest rate.

That being said, here’s what steps you’re going to take:

You need to know exactly how deep of a hole you’re in. For that, you’ll have to add up all the bills that you want to pay off. This is often the moment where people actually realize that this is serious. In any case, you want to include the debts that carry the highest interest rates first. I say this because sometimes your debt can be so high that you would be unable to secure a debt consolidation loan that would include them all. In this case, you should definitely include all the debts that carry the highest interest rates into the loan and deal with the other ones on your own. This is what will get you the best bang for your buck.
Check your credit score. This is probably the single biggest factor that’s going to determine whether or not you’ll get the loan and if you do, under what conditions (length, interest rate, penalties…). In order to put all maximize your chances, get your credit report (you can get it for free, without giving a credit card number and signing up for a trial) and check that all the information on there is accurate. Remember that you have three credit reports, and that they don’t necessarily all have the same information. Follow the advice on this article to dispute any mistakes on your credit report that you might spot. The better your score, the better terms you’ll get. You can figure out your loan payments by using loan amortization calculators.
Explore all your options by searching for the best debt management programs out there. This is made easier these days by the Internet, where you can quickly and easily get competing quotes from debt consolidation companies. Think long and hard before you borrow from family or from a friend. If you’re unable to pay the loan back, it can cost you the relationship with that person.
As much as possible, apply for an unsecured bill consolidation loan. Unsecured here means that the loan is not attached to any asset you own. If you get a secured bill consolidation loan (usually backed by the equity you have in your house), you stand to lose the asset you gave as collateral if you can’t pay off the loan.
Look into peer-to-peer lending, also known as social lending. This has been a hot trend lately: people lend and borrow money through a central platform, usually a website. You will get an interest rate that is based on your credit score, and the lender is another individual like yourself. Some websites allow the disbursement of your loan once your application has been approved. Others require that another member review and approve your profile before the disbursement process gets underway.

Keep in mind that, as previously said, you’re putting yourself at risk if you don’t correct the spending patterns that got you in trouble in the first place.