If you feel like you’re drowning in debt, you’re not alone. Bad debt can occur due to job loss, bad business deals, mismanaging loans, and late credit card payments. However, what matters most is that you find the right solution to get out of debt, not how you got into debt in the first place. Before you consider declaring bankruptcy, it is crucial that you first think about a debt consolidation loan.
What are debt consolidation loans?
As the name suggests, a debt consolidation loan is when all of your debts are gathered into one lump sum to be paid in installments. This removes the headache of making several monthly payments and instead allows you to pay a single monthly bill to one company. The main focus usually is to get a low interest rate so that you can pay off your debts faster.
Unsecured debt consolidation loans do exist, but it is always better to give security in collateral. This way, the probability of getting approved is much higher, and it will also help you obtain low interest rates, which is a plus when you are considering a debt consolidation loan.
The cost-benefit of debt consolidation loans
It is always a good idea to consider the cost-benefit for every critical financial decision, and a debt consolidation loan is no exception. There are two costs that you should look at before you decide if this loan will benefit you. The first is the monthly cost, and the second is the total cost. These costs are the number of payments you choose and the annual percentage rate.
Terms for personal loans range from 6 to 60 months. Even though choosing a longer period will decrease the monthly payments, it will increase the total cost of borrowing since there will be more time for interest charges to accrue.
Moreover, the annual percentage rates on unsecured loans are gauged based on your credit score. If this score is low, both monthly payments and total costs are most likely to be very high.
Benefits of a debt consolidation loan
Before you decide against it, you must look at the benefits of a debt consolidation loan. The biggest advantages are the following:
1. Simplified finances
A debt consolidation loan combines many monthly payments into just one. You will only have to worry about one lender and therefore only one monthly bill, which will keep you consistent when paying off your debt. It also allows you not to miss any payments, thereby lowering your credit score.
2. Possible Low-interest rates
Debt consolidation can help you go from paying many loans with different interest rates to one loan with just one overall interest rate, the lender will determine how much interest you pay based on your credit score. The higher your credit score is, the lower your interest rate will be. Therefore, a significantly lower interest rate is possible, but your credit score plays a big role in what the interest rate actually ends up being.
3. Fixed payments
Unlike credit cards, debt consolidation loans have fixed interest rates which is why the monthly payment will be the same every month. This helps a lot in paying off your debts in the long run.
Debt consolidation loans with bad credit
Many people who consider debt consolidation loans are in a lot of debt, which is causing a damaged credit score. No need to panic! There are still ways in which you can consolidate debt with bad credit. Firstly, it is recommended that you get in touch with a professional credit consultant. You can also contact a company that has a debt consolidation program, as they will answer any of your questions and concerns.
Where can you get a debt consolidation loan with bad credit?
1. Credit unions
Credit unions are non-profit financial organizations that offer flexible terms and low-interest rates. But it’s not easy to get consolidation loans with bad credit. The downside is that they do not allow you to pre-qualify for a loan. Usually, there is a requirement for a hard credit check. This can hurt your credit score and make it difficult for you to shop around.
To apply for a debt consolidation loan with bad credit, you’ll need to become a member of a credit union and work nearby. A minor membership fee is also required.
2. Online lenders
Using online lenders is a great option since it is a fast funding option. The process takes only a few days to get approved. The downside is that online lenders offer high interest rate. They also charge origination fees which cover your costs for processing the loan. This amount is deducted from the loan proceeds. A good solution to this cost is requesting a larger loan so that it covers your debt along with the online lenders’ fee.
A few things to consider
Before you decide whether or not a debt consolidation loan is a viable option for you, here are a few things to consider:
- The principal amount you owe will remain the same, but only the interest amount will change after debt consolidation.
- After debt consolidation, you may fall into a false sense of security by seeing a higher balance on your credit card. This may lead to you overspending, which can bring you back to square one.
- Security issues can arise when you use collateral. This is because the lending institution may reclaim the asset if you’re unable to pay your installment. Moreover, consolidation lenders tend to be far less forgiving than credit card and utility companies.
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