It’s quite difficult to obtain debt consolidation loans for self-employed individuals since lenders usually have strict lending criteria. However, if you manage to tick all the qualifications, don’t worry about anything else and keep going. Find out all about the criteria and benefits of it through this discussion!
Definition of Debt Consolidation Loans
According to Investopedia, debt consolidation loans can help your credit score in the long term. It’s because your debt can be merged into one with a fixed interest, and you’ll be able to pay it monthly without worrying about increasing interest. The due dates will also be easy to handle since all the debts have become one.
However, it’s quite challenging to qualify for a debt consolidation loan if your credit score is around 669 or lower. So, ensure that your credit score is 670 or above so that the lenders will approve your loans quickly. It’s even far better if you have a credit score of 740 to 800.
Types of Debt Consolidation Loans for Self-Employed Individuals
Other than understanding the definition of debt consolidation loans, ensure you know that there are two types of it. Learn more about each debt consolidation loan type in the brief below.
1. Secured Debt Loan
If you signed up for a secured debt loan, it means that you need to put up some assets as collateral. Hence, if you can’t pay the debts regularly as promised, then the lender has the right to seize the asset to collect the funds he has lent to you.
The assets that are commonly used as collateral are auto loans and mortgages. For instance, if you as a borrower can’t make punctual payments, then the lender has the right to take ownership of your vehicle or property.
2. Unsecured Debt Loan
On the contrary, the unsecured debt loan means that there is no collateral backing once you sign up for this loan. However, the downside of this loan is that if you as a borrower default on the debt, then the lender has the right to initiate a lawsuit to collect what you owe him.
Since there is no collateral backing, lenders only depend on the borrowers’ creditworthiness and their promise to make punctual repayments. Hence, it’s only natural that the borrowers (e.g. banks) usually charge a higher interest rate, and the other requirements are commonly stricter than the secured debt loan qualifications.
3 Possible Benefits of Debt Consolidation Loans
Getting debt consolidation loans for self-employed individuals offers you some upsides that you can consider in the following explanation.
1. Strengthen Your Financial Planning
By merging all your debts into one, you can easily manage payment, and your financial planning can be improved significantly.
2. Better Future Credit Score
When you can prove yourself as a timely borrower, your credit rating can also offer a beneficial effect.
3. Reduce Your Overall Loan Payments
The total amount of interest you need to pay on one loan payment can be reduced notably with debt consolidation loans.
How to Get Debt Consolidation Loans for Self-Employed Individuals
There are six requirements you need to fulfill before applying, to maximize the probability of approval. Get your debt consolidation loans by adhering to the steps below.
1. Assess Your Credit Score
Don’t forget that you need a credit score of at least 700 to be able to get a debt consolidation loan with a low interest rate. But, bear in mind that a lower credit score doesn’t mean it equals a denial, since there are lenders who are willing to offer loans for bad credit.
Hence, check your credit score as soon as possible through the Annual Credit Report website. There, you could request a free copy of your credit report weekly. Thus, you can see your repayment activity, borrowing history, and negative marks on your credit score.
2. List Your Debts and Payments
List all the debt accounts, the amount you owe, the interest rate, also the minimum monthly payment. That way, you can count on all of them to know how big of a loan you need to consolidate.
Then, you can add up all of your minimum payment amounts. As a result, you’ll know how much a monthly payment on a debt consolidation loan you can get. Don’t forget to use a loan calculator to know the terms and interest rates you need to fulfill.
3. Calculate Your Debt-to-Income (DTI) Ratio
You can know whether your request can be approved by calculating your debt-to-income (DTI). Measure them carefully by dividing the total of your monthly debt payments by the amount you earn before taxes and other deductions.
For instance, imagine you pay $300 in minimum monthly credit card, also you have an auto and personal loan of $900 in total. If you get around $3,000 a month, then your DTI ratio would be 40%. Here are the calculation examples.
a. Monthly debt payments in total: $300 + $900 = $1,200
b. Gross monthly wages: $3,000
c. DTI calculation [$1,200 (total monthly debt payments) / $3,000 (gross monthly wages)] x 100 = 40%.
As long as the percentage doesn’t exceed 45, then your chance of getting qualified to obtain a debt consolidation loan is high.
4. Compare the Lenders
Another step you need to take before getting debt consolidation loans for self-employed individuals is comparing the lenders. Check the annual percentage rate (APR), fees, and the other advantages the lenders offer you. Don’t forget to check the consumer feedback on platforms such as Trustpilot as well. So, you can determine whether you can trust the lenders.
5. Apply for the Loan
After all the steps above have been checked, then you can provide the necessary documents. For instance, you’ll need proof of income (tax returns or pay stubs), proof of identity (state-issued ID or passport), and proof of address (utility bill or credit card statement).
Once you gathered all the documents, you can immediately submit the loan application. You can choose whether you’ll apply online or by visiting the physical branch.
6. Ask Questions
If your request has been approved, then go ask questions you need to understand further from the lender. Do not approve the term agreements quickly.
Remember that you need to understand the contents of the loan documents first before the lender processes the file for closing.
Are You Ready to Get Debt Consolidation Loans for Self-Employed Individuals?
Merging all your debts into one can strengthen your financial planning and get a good credit score in the future. Therefore, don’t hesitate to apply for debt consolidation loans as soon as possible.
Furthermore, registering for debt consolidation loans for self-employed individuals doesn’t seem too hard. As long as you can assess your credit score, carefully calculate the debt-to-income ratio, and the percentage doesn’t exceed 45%, then you can easily apply for the loan.