A Guide To Debt Consolidation Loans
Debt consolidation may not seem practical for those with bad credit. However, it can help repay several high interest loans at a lower interest rate.
Optimizing your budget can justify loan consolidation. The approach involves paying off loans in advance by means of a new loan. This offers the advantage, on the one hand, to simplify your budget and get better visibility since you have only one credit.
On the other hand, it reduces your expenses, thanks to a lower interest rate.
You can also take advantage of an adjusted repayment period or reduced monthly payments. However, repaying the new loan over a longer period may mean more interest to pay, so a higher overall cost.
What Is The Role Of Debt Consolidation Lenders?
Signing up for a loan means that the lender settles all outstanding debts by leaving a single loan to be paid over an agreed period, at the agreed interest rate.
Choosing a reliable lender is important to avoid unfavourable terms. A credible lender typically has different debt consolidation loans to meet various needs.
Borrowers must clearly understand the different options and compare the offers of different lenders before applying for the loan.
While it is true that reputable banks and credit unions are probably out of bounds for borrowers with lower credit scores, there are several other options. The key, however, is to select the right lender without just falling for low interest rates.
Banks and credit unions look at the credit score before approving the loan application for an unsecured personal loan (no collateral required), which can be used to consolidate debts.
However, applicants with a bad credit score can qualify for the loan if they have a low level of indebtedness and a stable income to ensure regular repayments.
Credit counselling companies help people with bad credit to find the best way to get rid of their debts. They can also help borrowers negotiate lower interest rates with existing lenders.
Although most of these credit counselling agencies are not-for-profit, they are still likely to charge fees for their services. Again, due diligence is a must before resorting to counselling services.
On the other hand, debt relief companies do not offer debt consolidation loans, but they can help those with debts to effectively manage repayment or fully settle debt under negotiated terms or IVA (Individual Voluntary Arrangement). They achieve this objective through various ways, including:
Debt relief efforts are recommended if borrowers find it difficult to meet monthly repayment commitments.
Professional intervention in such cases helps establish a win-win situation, which makes it easier for borrowers to streamline payments while ensuring that lenders can recover at least a portion of the loan amount.
While debt consolidation loans and personal loans are available to people with bad credit scores, it should be noted that they are not cheap.
Based on the risk-based pricing method, the interest is high since there is no guarantee that the loan amount will be recovered thanks to the unsecured nature of these loans.
Bad credit adds to the risk. In the case of loan offers with lower interest rates, borrowers must look for hidden costs that can add to the expense.
Paying pending credit card fees and other affordable fees goes a long way to improve credit ratings before applying for a debt consolidation loan. Just three months of regular repayments can help achieve this objective.
Debts Eligible For Consolidation Loans
It is worth remembering that not all debts are eligible for consolidation loans. Current credits like revolving credit and store cards are not considered as debts.
If you have unpaid monthly payments on these credits, the amount due will be a debt it will be included in your purchase of credits.
Some Of The Debts Included In Consolidation Plans Include:
- An amount, which has gone beyond the overdraft limit allowed on your current account.
- An advance on wages, a deposit on a premium, an amount allocated by your employer.
- A family debt: it can be an amount loaned by a family member or a friend, you can integrate the amount of this debt in the new loan.
- A council tax or social debt: tax delays, inheritance rights.
- Debts related to a divorce and social debts.
In some cases, the consolidation may extend to rent delays if you are a tenant. Bailiff debts or moratorium: if you are late on your repayments or have agreed on a monthly payment (sometimes called moratorium).
The bailiff will produce a mail with an order of amounts due.
For reputable institutions, the purpose of debt consolidation is not only to save the client money by consolidating all his debts into a single, lower-cost loan but also to make life easier.
The approach allows debtors to avoid any oversights because they will be only one payment to make every month.
An individual with a total balance of £25,500 on two credit cards at a rate of 21.5 percent and pays only the minimum monthly amount required.
If this debtor agrees to pay these debts on a term of 48 months – without making new purchases – the cost of credit will total £14,945.
The individual has the capacity to consolidate the debts by replacing them with an unsecured personal loan at a floating rate of 6.45 percent over a period of 48 months.
Thus, the cost of credit over the period will be £5,811. The interest rate paid on the loan serves as a barometer.
Where Can I Get A Debt Consolidation Loan?
Some banks and institutions offer loans specifically dedicated to credit consolidations, some of which are limited (exclude some debts like revolving loans).
Generally, any unaffected personal loan can be consolidated. Some banks only lend to their own customers or to someone who agrees to become a customer.
Before asking your bank about a potential loan consolidation, first consult other financial institutions. One of them may make you an interesting.
Determining the amount of the loan repayment is simple: it is the total amount due on your outstanding credits, excluding any prepayment compensation.
Whatever the amount to borrow, ensure that your finances are healthy. Borrowers whose debt is out of proportion to resources or income and those who have low credits scores are almost always rejected by banks and conventional institutions.
Only specialists from the credit union accept them under draconian conditions.
Moreover, given the limits on the amount and duration of consolidation loans, mortgages may not be applicable unless they have been specifically designed for this purpose.