Bad Credit Debt Consolidation Loans
Bad credit debt consolidation loans may be the answer to your financial stress. Here's some information to help you make an informed decision when to consolidate. Loan consolidation as you might have heard from your agent or just about anyone in the financial industry is one of the best ways to organize and pay off loans. It is a great option if you are the type of person who needs to clear up multiple outstanding debts or bills. Before getting into the meat of the matter, let us first get some clarity on the subject at hand. There are a few concepts that might not be well known to people who do not have a background in finance.
What is Bad Credit?
Credit is something that most of us know and almost all of us are in, in some way or the other. Credit is what is owed in cash. When a person or a company is in credit, it means that there is a financial obligation pending on an exchange of goods or services. Credit is often called the payment in the future. So you get a product or a service now and pay for it later. The thing about credit is that it has to be paid back, usually with a bit more for the convenience.
The first instances of recorded credit happened in the year 1300 BC between the Babylonians and Assyrians. They developed a rudimentary system that is pretty much used to this day. Loans were created based on mortgages and advances based on deposits. The slips hence created can then be used as a way to pay a third party for the amount owed. It was an easy way to make payments without actually carrying a ton of gold everywhere they went.
Fast forward a few thousand years, bank loans and repayment methods were common places. There are banks that are continuously in operation from the 1400s to this day (the Banca Monte dei Paschi di Siena). The main function of any bank is to accept deposits and hand out loans. It is around these tenets that every bank operates. Giving out loans to people who are in need of it is how banks also make most of their money. They charge a certain amount in interest depending on the type of loan and the duration of the repayment time. This amount will add up in the course of the repayment. When you are not able to make payments or if the person who has taken the loan refuses to make payments, then they are called bad debts. It is a loss for the bank. Now, no one is stopping the same person from doing this over and over causing a string of unchecked loans from banks.
That is why the credit rating system was introduced. In this system, every person has a file and in it, there are entries made every time there is a banking transaction made. So every time there is a loan taken, there will be a new entry. When all the installments are paid on time, another entry is made. So depending on how well the person is able to maintain their finances, there is a score that is assigned. So naturally, a high score means you are a financially responsible human. Banks will be willing to extend you a line of credit without any further thought. It makes the loan application process fair and simple. When you approach a credit card issuer, they can tell right away if you are going to be a good customer or not. Bad credit happens when your scores are low and as a result, you are not able to convince any bank to offer you a mortgage, car loan, educational loan, or even a personal loan.
Why People Get Bad Credit
There are several reasons as to why a person can fall into bad debt. In most cases, it is because you were reckless with credit in the first place, or a major life event changed your cash flow. Credit cards are cheap and at a young age, spending money that you don’t have yet is alluring and people tend to not care about consequences. This is also not the case for everyone. There are a good number of people who get into such situations because of things beyond their own control. Either way, when loans are taken and not paid back in time, they build up and the score gets worse and worse every time.
Another thing that you have to remember is that if you do not take any loans or use credit cards all your life, it might seem like you by default have good credit. That is a complete myth. In fact, if you have no record of taking any loans or using any cards, that means you have no score, not a high score. Having no score does not make you a responsible person. So you actually need to take loans or credit cards and make continuous payments that are regular and on time to gain credibility as a customer for banks.
What is Debt Consolidation?
Debt consolidation is the process through which all your debt is brought together to one loan and you can make one payment instead of the five or six that you might be forced to make. As a financial tool, it is a near perfect way to bring your situation into control.
How Debt Consolidation Works
Let us assume you have large debt and all your debt is in different places. You have a mortgage, a car loan, a student loan, 4 credit cards, and one stream of income. You receive emails and bills come in your letter box frequently enough. So at the start of every month, you gather yourself and begin to pay them off one by one. That is seven payments to keep track of, each going to different places and different amounts. That is not impossible to handle by any means, but people tend to forget, misplace, and payments might not get through. It is human nature to let something like this slip through and if you do, not only will have to pay off more in term of fines, but your credit scores will also get hit.
After a few times of that happening, the payments you make every month will not only get bigger, the duration of each loan will also increase. What you need at a time of crisis like this is to have one payment to make. So what you can do is get a consolidation. Then you have one payment to make instead of 5.
That being said, not all loans can be consolidated. There are two kinds of debts that you can be in. First, you have your secured loans- ones that have collateral. These are loans which are covered by an asset that it is paying for. Take a housing loan or a car loan, for example, if you do not make enough payments, the bank or the lender can come up and take your car away. Mortgages that go unpaid are handed over to banks that will then proceed to sell the house and recover their losses. Unsecured loans, on the other hand, do not have this backing. They are given to you on the basis of good faith. The only thing that can happen to you is that your credit scores will take serious damage and structured loans and other lines of credit will be closed to you. If you do manage to get a loan, it will be expensive and simply not worth your time.
So a loan consolidation is designed to gather all of your unsecured loans together. So keeping to the above example, your car and mortgage will still be there, but apart from it, all of your credit cards and student loans as well as your personal loans, if you have any will be brought together. A loan consolidator will contact your credit card provider and the banks that offered you your student loan and personal loan. Then all of them will be paid off in one shot. So you can foreclose your loans in one go. Now you will be left with one payment to make.
When to Consolidate
There are times when a consolidation is the best thing to do, other times, not so much. Here are a few pointers that might help you with making the decision on whether to consolidate your loans or not.
Lower Interest Rates
If there is a chance that you are getting a lower interest rate than what you are paying now, you should definitely go for it. Let's say you have 3 credit cards and all of them have an interest rate ranging between 18% to 24%. In such cases, if you are able to land a consolidation that goes at a rate of, say 7% to 9%, it is profitable enough for you to consider seriously.
Shorter Payment Duration
Not many understand this, but even if you are making the minimum payments on your credit card, you are going to be paying out your bills for perpetuity. For example, an outstanding amount on your bill, if cleared by making minimum payments will be drawn out for as long as legally possible, if you do not stop using your card in that mean time, you are stuck making payments pretty much forever. Consolidation loans, on the other hand, have a fixed end period. They normally go between 3 to 5 years. So at the end of it, you are done with the debt, it is a way to effectively shorten your payments. That includes student loans. If you want to get your loans cleared up sooner than the original term, it would be a good idea to go with a consolidation.
Types of Interest
Variable interest rates are great, but when the market swings in your favor, you could be stuck paying a lot more than you bargained for. A consolidation can bring an end to all of this uncertainty by bringing in a single rate of interest. While it might be a little more than the original rate at which you got your loans for, it is a good way to bring some stability into your finances, especially when the market is volatile.
When Not to Consolidate
There are a few instances where it is not really a good idea to consolidate your loans.
• Short Time Period
If there are only a few months, or your loans end within the year, there really is no point in consolidating your loans. It then becomes too much of a hassle and the money you save will not really be worth it.
• Cash Flow Woes
This is probably the biggest cause for concern. The idea here is that you need to pay off your debts quickly, but if you are unable to make the payments, the very purpose of consolidation is lost. You can still make minimal payments if you hold on to the credit card debts as is and coast till your money problems get sorted out. A loan consolidation EMI will be a fixed repayment so every month, you will have to cough up the money regularly.
• Need to Continue Using Credit Cards
When you get into a consolidation program, It is likely that you are willing to stop taking more debt. It is a recovery process, so you will have to give up all of your cards and not use them till you are done clearing all of your debts. If you cannot do this and keep on applying for new cards, your credit score is not going to get any better. You will end up damaging your score more than you think. A loan consolidation is not something that is done only when you are in the depths with your credit score. It can be done if you want to wrap up a few loans quickly and efficiently. If you, however, need to improve your bad credit, then a debt consolidation is a solid option any way you see it. If you feel like you are in need of one contact an agent today and get a consultation right away.