Thinking about using a debt consolidation loan to get rid of high interest debt? Don’t just jump into it, do it the right way. Here are some tips for selecting the right amount and price.
Examine Your Budget
If you haven’t already created a budget, now is the time. List every monthly expense you have. Here is the example Prosper provides:
Monthly expenses: $ (Fill in Total)
Car expenses: $
Phone, cable, internet: $
Food, entertainment: $
Clothing, household expenses $
Credit cards and other loans: $
Other expenses: $
If you leave something blank here, be sure to explain. For example, no rent because you live with your parents. Cool, make sure to mention that. You might want to include 2 lists or total monthly expense figures: 1) current monthly expenses and 2) total monthly expenses with your prosper loan. This can be especially useful if this loan will decrease your monthly expense load.
Be conservative here, everybody slips sometimes. You don’t want to deceive potential lenders, but more importantly you want to be honest with yourself. Missing payments on a Prosper loan will ding your credit score just like any other loan. Don’t risk it.
List Debt Obligations with Interest Rates
Not only are the lender interested in these figures, but these numbers are very important to you as a borrower. Here’s my list when I applied for a loan:
As you can see, some obligations are more pressing than others. These 22-30% APR accounts were killing me. I just couldn’t get ahead. By the way, this is a great time for you to call your credit card companies. Many are willing to lower your rates if you have a good payment history. Those that won’t? They become the target for your consolidation loan.
Determine a Cut Off Line
I decided to attack the accounts above 20% (shaded in table above). That is 7 out of the my 10 accounts with balances totaling more than $7000. I found a 0% balance transfer for $2000 and requested a $5000 loan from Prosper at 19%. Consolidating these debts would not only reduce my monthly finance charge, but would also help me improve my credit score by reducing the number of accounts carrying balances.
Why not consolidate all of my debt into one payment? Several reasons:
- Lower amounts fund quickly. You are more likely to get funded if you request a small amount. It will take fewer lenders to fully fund a small loan. Also, its going to seem less risky for them. They want to see a monthly payment that you can definitely handle. Plus you’ll have a lower DTI, that helps too.
- More likely to get funded at a higher rate. If you’re credit is less than perfect, you can not expect a low rate. By selecting only your highest interest debts for this loan, you can reasonably ask for a rate that will save you money.
- Gain leverage with the credit card companies. As soon as my balances were paid in full, Chase and Discover began to see the light. Credit limit increases and great balance transfer deals started flying my way in no time. APRs were dropping like flies. For example, Chase offered me a fixed 5.99% balance transfer with no fee. That is a great deal. I was able to use that on my next highest interest credit card account for additional savings. I would have lost the opportunity to take advantage of that if I had consolidated all of my debts at once. You might also want to stay on the lookout for 0% transfers for some of your remaining balances. No loan on Prosper will ever beat that deal!
Determine a Good Rate
This rate should be lower than the average APR of the debts you’re consolidating and close to the average APR for loans with your credit grade. Prosper will suggest a rate. Depending on your stats, you might want to go with that rate. If you have a steady income, low DTI, less than 2 inquiries in the last 6 months, and a well-written listing you might be able to go with a couple points lower than the average. Remember, if you’re loan is funded, there’s a great chance that people will bid below this rate. My listing started at 19% and ended below 15%. Choose a number higher than you hope for to make the loan more attractive — but don’t go higher than the average APR of the loans you’re consolidating.
Most importantly, take time filling out a detailed and honest listing. This loan could help you out tremendously, it’s definitely worth the time. Good luck consolidating your debts! I hope that you find my experience helpful.
Me vs Debt in an excellent personal finance blog written by a sucessfule Prosper borrower.