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Consolidation Loans for Bad Credit - How do they work?

Struggling with debt and a bad credit score? Find out everything you need to know about consolidation loans and if it's right for you.

Consolidation Loans for Bad Credit - How do they work?

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Managing debt and bad credit scores can be a hassle, especially with unorganised finances. Are you looking for ways to improve your credit score? Check your credit score now.

A consolidation loan can be an easy way to manage debt, and can even help you improve your credit score.

When dealing with multiple personal loan repayments, you may find yourself considering your options for repayment. One method of repayment is a loan for debt consolidation - but what is debt consolidation?

A debt consolidation loan is when all existing debts are combined, creating one loan. Rather than multiple loans with multiple repayments, a debt consolidation combines all loans into one repayment.

Debt consolidation is also known as refinancing. Refinancing debts can make it easier for people to pay off their debts, however, it is important to be aware of the various impacts a debt consolidation loan might have. For example, existing debt and a bad credit score can impact interest rates and monthly repayments.

Consolidating debt might not be the route to take depending on your own personal loans, different interest rates existing for them, various loan term periods, or even the loan terms. The lending criteria is subject to the individual financial situation, therefore a consultation with a financial expert is advised.

There are many benefits of a consolidation loan, including improving your credit score, having easy to manage repayments, and knowing when your debt will be settled.

Improving credit score

Turning around your credit history is important, and a consolidated loan has the chance to impact your credit score positively. Having a bad credit rating can cause future difficulties when it comes to applying for further loans.

With a debt consolidation loan, repayments are generally paid off faster than they would have otherwise been had the consolidation not occurred.

Easy to manage repayments

Aside from improving credit score, debt consolidation loans are perfect for borrowers who are struggling to keep on top of their finances. Multiple ongoing fees with multiple lenders can be confusing, and debt consolidation loans strive to make it simple.

With debt consolidation, the average interest rate is taken from the other interest rates from the loan amounts. This makes it easier to manage outstanding debts because it is not only the debt that is being taken into account, but also one singular interest rate compared to multiple different interest rates.

Different payment plans can be implemented to suit each individual borrower's needs. The most popular plans are a fortnightly or monthly repayment for a debt consolidation loan, although some borrowers do prefer weekly instalments.

End date for debt

Having a debt repayment schedule for your consolidated debts allows for a clear idea about when your debts will be paid in full. With an end date in sight, this incentivises borrowers to stay on top of their repayment schedule to reach their target date of being debt-free.

Borrowers can pay off their debt sooner when they have a debt consolidation loan, as the end date for their debt acts as an incentive to successfully complete their monthly repayments, minimising the interest rate and interest paid. Some borrowers are inspired by an early repayment scheme, granting more borrowing power in the future for an improved credit score and to save money in the long run.

Debt consolidation loans make it easier to have a clear idea for when the personal loans will be paid off, which could have been weighing on the minds of borrowers for potentially years.

There are two types of consolidation loans available: Unsecured and Secured.

Unsecured

An unsecured personal loan allows a borrower to access funds from a financial provider without needing to establish any asset security for the lending. This means the financial provider can provide a loan to a borrower, without the borrower providing assets as security or a backup if they cannot repay the loan.

As an unsecured personal loan does not require any security for the loan, the compromise is a higher interest rate. This interest rate is usually much higher than that of a secured loan. The benefit of an unsecured personal loan includes flexibility, little risk of your assets being repossessed as they are not used for security, and a more convenient application process.

Secured loans have a lengthier application process due to the extra steps for asset security, therefore, if you need a loan approved faster - an unsecured personal loan is the better option.

Secured

Secured loans are loans granted that are 'secured' by a valuable asset or assets of the borrower, such as a house, car, savings account, or other high-value property.

Secured loans allow a borrower to access funds from their financial provider, with the consequence of asset repossession if the loans are not paid back. Although this consequence has a large detriment, the benefit of a secured loan is a lower interest rate compared to an unsecured loan. Because of the high level of security, secured loans can be for larger sums of money compared to unsecured loans. This is because of the risk assessment with an unsecured personal loan potentially not being paid.

Various personal loans can be consolidated to encompass a debt consolidation loan, including a home loan, a car loan, and a credit card loan. For loans to be consolidated, all personal loans must be added up to determine the complete loan amount.

The first process for loans to be consolidated is for the borrower to meet the lending eligibility criteria. The two foundational pillars of eligibility are a good credit rating and steady income. Although a poor credit rating can still pass the eligibility criteria, it often comes with higher interest rates. Proof of income will need to be provided, usually with payslips and bank statements.

Credit scores affect debt consolidation loans, for example, a low credit score can mean higher interest rates for the consolidation loan. Inversely, a high credit score can mean lower interest rates for the consolidation loan.

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