Are you considering debt consolidation loans for poor credit scores? If you are, then you’re probably nearing bankruptcy, dealing with poor credit record, or just trying to manage your finances better. But don’t just hastily start the debt consolidation process either.
Here are a few things that you must know about it. Keep in mind that, like all types of debt management practices; there are pros and cons to debt consolidation and its loans.
Definition of Debt Consolidation
With debt consolidation, you will get a single yet significant loan to pay off several smaller loans. You will then just make a single monthly payment to a single creditor instead of making several monthly payments to numerous creditors.
The theory: You will likely have an easier time making a single monthly payment. You can then pay off your loan in a cost-efficient and result-effective manner.
The goal: You will enjoy reduced interest rate on your loan. Your reduced cost of borrowing is, indeed, one of the benefits of a debt consolidation loan.
Emphasis must be made about the difference between debt settlement and debt consolation. With debt consolidation loans for poor credit scores, you’re paying your total debts in full without adverse effects on your credit record.
Types of Debt Consolidation Loans
There are two main types to consider. First, a secured loan requires collateral, such as real or tangible property (e.g., home or car). The collateral serves as the security for the loan – in the event of failure to pay for a specified number of months, the property will be seized to satisfy the loan.
A few of the benefits of taking out a secured loan are:
Easier to obtain since creditors carry lesser risks of non-repayment of loan
Lower interest rates
Lower monthly payments
Tax-deductible interest payments in a few cases (e.g., real property as security)
But there are also disadvantages to secured debt consolidation loans:
Higher risk of losing the collateral, such as your retirement fund, life insurance, car, or house
Longer term for the guaranteed loan in comparison with the provisions of the original loans consolidated
Second, unsecured debt consolidation loans are based only on the debtor’s promise to pay. You will not be required to present collateral, as is the case in credit card loans.
The benefits are:
No real and tangible property is at risk
Possibly lower interest rate in comparison with the interest rate charged on several credit card balances
You must take note, nonetheless, that the interest rate will likely be higher in an unsecured loan than in a secured loan. Your creditor is taking greater risks, thus, the higher interest rate.
But an unsecured debt consolidation loans for people who have low credit ratings has its drawbacks too. You will have a more challenging time qualifying for it because many creditors will not take the risk. You will also likely shoulder the burden of higher interest rates resulting in high monthly payments.
In conclusion, if you’re considering debt consolidation loans for poor credit scores, you should consult with a debt management expert. You have to consider their pros and cons, perhaps even consider alternatives.