How Debt Consolidation Loans Work

Applying for a debt consolidation means that you will be applying for a new loan. Your new lender will purchase your old loan or loans and offer you a new loan term and a new payment agreement. You will then have only one monthly payment with one lender instead of several loans with several lenders.

Why People Choose Debt Consolidation Loans

Having numerous loans can seem like a big hassle. There are a lot of different due dates to keep up with, different terms to consider. Most people choose debt consolidation loans because they seem like an easier method for handling their debts. This can be especially true if the individual is behind on their loans or feels like they can no longer manage all of their payments. Unfortunately, this assumption is not always true.

The Truth About Debt Consolidation Loans

Often your lender can purchase your old loans at a lower price. This is not always the case. Even if they are able to purchase it at a lower rate, you may have a higher interest rate. This can be especially true if you have had any late payments or new credit blemishes since you took out your original loans. You may even have early pay-off fees with your old lenders included in your loan with your new lender. So, while it may seem that debt consolidation loans will save you money, you usually end up paying the same amount and, in some very unfortunate cases, you may end up paying more.

Another thing that isn’t always shared with individuals when they apply for a debt consolidation loan is that debt consolidation loans can actually damage your credit. Credit bureaus look at a variety of factors when determine your credit rating. When you close several accounts, it can have a negative impact on your credit in the short term and, in some cases, the long term. If you make your new payments on time, you can recover your credit score with time but always remember that credit score is actually based your ability to manage credit.

When is a Debt Consolidation Loan a Good Idea?

A debt consolidation loan is not a bad idea for everyone. There are some cases, like the potential of foreclosure or bankruptcy, in which debt consolidation is a better option. Carefully evaluating your situation and determining whether or not there is another way to manage your debt problems can sometimes help you avoid a poor credit decision like a debt consolidation loan. If, however, there are no other options, then a debt consolidation might be right for you.

The Importance of Smart Shopping

You should never accept a debt consolidation loan from the very first company you talk to. You should take the time to check with as many debt consolidation institutions as you possibly can. You can find debt consolidation options on the internet, at banks, through credit unions, specialized lenders and even credit card companies that will allow you to consolidate your credit card debts onto one card.

Ask for an outline of the loan terms in writing. Look at all the aspects of the loan, like the interest rate, repayment period, total cost for the loan and the monthly payment for the loans. Also check the fine print for any clauses that may penalize you for paying off your new loan early, maintenance fees, administrative fees or any other fees that may not be directly disclosed to you. These extras can mean big bucks for you if you’re not careful.

Paying Your New Loan

Even though your debt consolidation loan can cause some damage to your credit score in the short term, it can help your credit score in the long run, especially if you make your payments on time. Do your best to keep your new loan with the same lender. This will also help your credit score in the long run.

If you do not have any early loan payoff penalties, pay a little extra each month on your loan. This amount will help shorten the term of your loan and decrease the amount of interest you pay over the life of the loan. Even if the extra you can afford each month seems like a small amount, it can add up over time.

If you should need a debt consolidation loan, look at it as a new start. Use this time to effectively manage your credit so that you can rebuild your credit score over time. When your credit score increases and you are eligible for new lines of credit, make sure that you don’t overextend yourself. This will prevent credit problems for you in the future.

How Creativity Can Help You Get Out of Debt

Unfortunately, there aren’t any payday loan consolidation companies. There are, however, some options for consolidating your payday loans; you just have to be creative. Think outside the box and try to come up with a way to pay off the loans in a way that will help you get your finances and your budget back on track. Tapped out for ideas? Try a few of the following.

Secured Consolidation Loans

If you have enough debt and decent enough credit, you might be able to take out a secured consolidation loan. While this really isn’t an answer to your problem, a secured consolidation loan is more favorable than continuing to pay outlandish interest rates and payday loan fees.

Be aware, however, that you will have to place your home up for collateral to obtain a secured consolidation loan. Make your payments on time and learn how to more effectively budget your money. You may even want to work on starting up a savings plan so that you can avoid payday loans in the future.

Unsecured Personal Loans

Another option is an unsecured personal loan through your bank or another financial institution. While the interest rates are generally higher for unsecured loans than for secured loans, the interest rate should still be significantly lower than the rates on your payday loans. Plus, you don’t have to worry about putting your home up for collateral. Of course, don’t mistake this advantage for a reason to make your payments late. Late payments will still have a negative impact on your credit score.

The biggest disadvantage to unsecured personal loans is that you do have to have pretty good credit to get approved. In most cases, a score below 720 will be denied. You may not have a credit score this high, making it necessary for you to choose a different option for paying off your payday loan debt.

Zero Interest or Low Interest Credit Cards

Another option is to apply for a zero interest or low interest credit card and place all of your payday loans on the credit card. This will allow you to pay off your payday loans and make payments to your credit card company without all of the continuing interest. Keep in mind, however, that zero or low interest credit cards are only offering you an introductory rate. If you don’t pay off the balance before then, you are likely to be right back in the same situation. Make good choices and pay as much as you can afford on the balance before time runs out.

Private Lenders

Private lenders are a little known secret that so few people ever even think about. Private lenders loan money to people, just like you, for a variety of reasons. While you will have to meet their terms and conditions and you will have to pay an interest rate, the terms, conditions and rates are usually much more favorable than the payday loan terms, conditions and rates. You can find private lenders in a variety of places.

Family and Friends

Have a family member or friend with a decent amount of money or good credit? Try to employ their help. Many family members and friends are helpful when it comes to getting out of debt trouble. They care about you and don’t want to see you struggling. Just be sure to put everything in writing, ask for a receipt and make your payment on time. This will help prevent problems between you and the lender and keep your relationship from going sour.

You should also consider paying your friend or family member an interest rate on the loan. This will give them an incentive to lend you the money and it will help them feel good about helping you get out of debt. Again, just be sure to get everything in writing and make sure that the interest rate you agree on is fair.

There are so many other options when it comes to paying off your payday loans. Sit, ponder and think; come up with something creative or simply use one of the ideas above. Whatever you decide, use good financial planning and budgeting in the future so you can avoid getting into the same situation in the future.

The Dangers of Scams

Because you have bad credit, many scammers assume that you also have bad judgment. Don’t prove them right! Protect yourself from scams by being able to recognize them. Know the common practices of legitimate credit lenders as well as illegitimate lenders. Don’t accept any company, especially companies online, at face value.

Know Your Lending Options

Whether you have good credit or bad credit, there are pros and cons to different lending options. Some options are not a wise credit choice – as you now know. Other options will help you get a handle on your credit payments and your bills.

You should also know that, because you have bad credit, your lending options are more limited. The amount of limitations you face is contingent on the severity of your credit problems. You may find that the only options you have available to you are things like payday advances, which have extremely high interest rates, or secured loans, which put you at risk of losing something of value – like your home – if you fail to make your payments.

Take the time to contemplate the pros and cons of each of your lending options. Understand what you have to lose besides a step towards good credit, should you default on your loan. Things like payday loans can come back on you as a bad check, which could be considered fraud. Cash advances are also very high in interest and you can quickly get in over your head if you’re not careful.

In a secured loan, if you place your home up for collateral, you could lose your home if you fail to make your payments on time. This could put you at an even bigger risk than you are in now. If a secured loan is your only option, see if there are other ways to handle your current debt.

Search for Non-Lending Options

If you are really ready to get your credit back on track and can’t seem to find an option that seems reasonable or satisfactory, consider talking to a family member about helping you secure a lower interest rate and approval on a loan. If the size of your financial need is small, consider holding a yard sale or selling something in your home of value. Find ways around your debt problems without risking your credit.

Contacting Your Creditors

If you are behind on your payments and have been for quite some time, you might be able to find creditors that are willing to accept a smaller amount if you agree to pay the entire debt at once. This can hurt your credit score some in the short term but as long as you handle credit effectively in the future, it will eventually turn into something good because you did pay the debt – even if it wasn’t the full amount and you did pay it off, even if it wasn’t on time. This is still better than letting it just sit on your credit report for the next seven to ten years.

Debt Settlement

If you have a lot of debt and just don’t know how to approach it, then you could consider debt settlement. In this debt management option, the debt settlement company contacts your lenders and tries to convince them to take a smaller amount of money as payment in full. While this may seem like a great option, there are a lot of risks involved.

Some debt settlement companies are less than honest. Others have taken money from people, just like you, leaving them in a worse state than when they started. Others fail to make the designated payments to your creditors on time. This only further damages your credit score. Be very careful when considering debt settlement.

Debt Consolidation

An actual debt consolidation loan, which may be difficult to come by with bad credit unless you have collateral, is where you secure a new lender for your debts. They purchase all of your debts and loans, roll them all into one loan and then offer you a new loan term. This may cost you more money. In rare cases, it can save you money. Either way, your old debts will all be paid. For this reason, a debt consolidation loan can help you get your credit back on track – if you manage it correctly.

Becoming Debt Free

No matter which option you chose for managing your debt and getting your credit back on track, you can be sure that it will take a great deal of time. You didn’t get into credit trouble overnight and you won’t get out that quickly either. Make your payments a priority. Take care of them promptly and learn how to handle your newfound credit when you do start to see improvements.

Consolidation Software Options – Not Created Equal

As with any type of software, you will find that not all debt consolidation software options are created equal. Where some options are strong, others will be weak. Where some are user friendly, others are difficult to navigate. Where some may be effective at detecting ways that you can reduce your debt, others are very limited.

Take the time to research the different software options. Find out what other users are saying. If you know someone that has used a debt consolidation software program to help them get their finances back on track, ask them what they used. Examine all the angles and compare with scrutiny. If you happen to choose the wrong program, you could end up suffering consequences.

Consequences of Choosing the Wrong Debt Consolidation Software

Some debt consolidation software programs are free to use. Others charge you a very nominal fee. So, even if you decide to use the wrong software for your needs or decide on a poor quality software program, you won’t lose a lot of money upfront. You might, however, be further behind on your bills due to defects in the software program. You could experience a longer time frame for paying off your debts because the software failed to notice some important and helpful debt relief options. As you might guess, this will cost you more money in the end so heed the warning and avoid choosing the very first program you come across.

Free vs. Paid

In almost every case, you will get more out of a paid debt consolidation software program than you will a free program. This is because free programs, while still somewhat useful, are often tied to a debt consolidation or debt settlement company. They want you to call them so the last thing they really want to do is help you get out of debt. If they gave you a program that worked a hundred percent of the time, you wouldn’t need their services.

Paid programs aren’t always better though. Some are actually just as bad as the free ones. Look for reputable sources if you are going to be shelling out any money for your debt consolidation software. Do your research and make sure that the one you choose comes with a money-back-guaranteed, should you find out that it wasn’t really what you thought it would be.

Understand the Advantages

Obviously, if you find the right debt consolidation software, you can spend just a few hours working on a budget that will work for you or your family so that you can pay off your debts and get out of credit trouble. If you use the software wisely and stick to your new debt consolidation plan, you may even find that getting out of debt is easier than you thought. Of course, these advantages may not be received by everyone and disadvantages can sometimes outweigh the advantages.

The Risk of the Unknown

Very little is known about debt consolidation software because it is still so new. While there are a few important tidbits of information out there, the true potential of these programs won’t be recognized right away. More people need to use them, evaluate them and share their experiences before anyone really knows how they work or if they work at all.

Not a Solution for Serious Credit Problems.

Debt consolidation software is really a solution that is designed for individuals that have mild to moderate creditor issues. While they can serve as an effective means for handling small debt issues or devising a new debt management plan to help you get out of debt faster, they cannot perform miracles. If you have a serious debt problem and are facing potential bankruptcy, foreclosure or other potentially life-altering issues, it is best for you to contact a professional.

Online Communities

Some debt consolidation software programs offer an online community in conjunction with the debt consolidation software program. This too has both advantages and disadvantages. While it can help you formulate more ideas about getting out of debt faster or more effectively, in the online community, your identity can also be compromised, compounding your credit issue even further.

If you have considered using debt consolidation software to help you get out of debt fast, you may want to keep looking. If, however, you want an option that can help you look at your loans and income more objectively so that you can develop a better debt-free plan, then a debt consolidation software program might be the best option for you.

Why Avoiding Bankruptcy is Important

You hear how bad bankruptcy is all of the time but few people take the time to explain why. Understanding how bankruptcy can affect your future can help you understand the importance of finding an alternative, if at all possible.

The first thing you should be aware of is that you must now qualify for bankruptcy. It isn’t as easy to file as it used to be, thanks to the Bankruptcy Reform Act that passed in 2005. Certain income guidelines must be met before you can file for Chapter 7 bankruptcy – the kind of bankruptcy that eliminates all of your debt. If you do not qualify, you can still file for Chapter 13 bankruptcy. In this sect, you still have to pay back a portion of your debts so, really, it’s no different than other debt consolidation financing options.

Bankruptcy is also a long and tedious legal process. You must hire a lawyer, go to court and wait for the process to be completed before you have officially filed for bankruptcy. It is set up this way to try and encourage individuals to seek other debt relief options.

Bankruptcy will also have long-term effects on your credit. While your bankruptcy is awaiting discharge, you may find it next to impossible to secure even the simplest of things, like an apartment. This is because, while you are awaiting discharge, you can add things to your bankruptcy. Creditors don’t like the idea of being claimed on a bankruptcy because then you are not obligated to make any future payments to them.

Both Chapter 7 and Chapter 13 will also make it difficult for you to obtain lines of credit for an extended period of time. You may find it difficult to obtain things like cellular phones, credit cards and more. You may even have to pay huge deposits on utilities. Many of these items are necessary to daily life.

As you can see, bankruptcy isn’t easy and it isn’t pretty. This is why there are so many different debt consolidation financing options available. Finding the one that will work for you does take time but it is well worth the effort.

Debt Consolidation Loans

Debt consolidation loans can be either secured or unsecured. Secured consolidation loans are usually one of your best options. This is because you have the lowest interest rate possible on your loan and all of your debts are paid off by your home lender. The disadvantage, however, is that you have to have good credit and you have to meet all other criteria like income to debt ratio and home equity requirements. If you fail to meet the criteria, you are ineligible for a secured debt consolidation loan.

Unsecured debt consolidation loans are more difficult to get approved for. You also have a higher interest rate than you would on a secured debt consolidation loan. Your best option is to attempt a secured consolidation loan.

Zero or Low Interest Rate Credit Cards

Depending on the type of debt you have and the amount you owe, a zero interest or low interest credit card could help you get on a fast track to managing your debt more effectively. This, however, takes a lot of discipline. Since the low interest rate will only last for a short period of time, you will want to be certain that the entire balance is paid off before the introductory rate period is over. Otherwise, you could face hefty fees – fees that may be much more than your original fees with your original creditors.

Consolidation Companies, Credit Counselors, Debt Management Programs

One of the most recent developments in debt consolidation financing is the variety of debt relief companies that have surfaced. They all work a little differently and each has a set of advantages and disadvantages that you should be aware of – one of the biggest being illegitimate companies.  For many individuals, however, this is a better option than loans, credit cards or bankruptcy could ever hope to be. In most cases,  you learn how to more effectively handle your credit and your budget as you work on paying off your debts.

Be aware that this option may also have some negative effects on your credit score. Debt help solutions like debt settlement can be the very worst on your credit and should only be considered in lieu of bankruptcy.

No matter which option you choose to manage your debt, take the time to shop around. Investigate every possible angle. Compare each option to your current situation. This will help you make an informed and educated decision about your credit and financial future.

What is Consolidation?

Loan consolidation means taking all of your loans and rolling them into one loan with one lender. Lenders do this by purchasing all of your old loans, often at a discounted rate. They then calculate how much they spent on all of your loans, add in any additional fees that they or your other institutions charged and your new interest rate. Since this is a completely new loan so you will be provided with new loan terms and conditions.

Can You Consolidate?

There are some restrictions on student loan consolidation, all of which you need to be aware of before looking for a consolidation loan. If you are consolidating for the first time, you can consolidate one or many loans. If you are considering reconsolidation, you must be able to add another loan to your current consolidation loan.

You should also be aware that you cannot consolidate a loan that is in default. You will either have to catch up on your current payments or make satisfactory repayment agreements with the consolidation lender before you can consolidate your loans. Keep in mind that this also means continuing to pay your current loans on time until the consolidation process is completed. Failure to do so could result in a denial for your consolidation loan.

Married couples are no longer able to consolidate their loans together but each person can consolidate their loans individually. This applies to parent loans and student loans as well. While both student and parent can each consolidate their loans individually, they cannot consolidate the loans together.

To consolidate your loan, your loans must be active or in the grace period. You can no longer consolidate loans while you are still in school. If you consolidate your loan during the grace period, you are also likely to lose your grace period. This should be taken into consideration before applying for a consolidation loan while still in the grace period.

Should You Consolidate?

Now that you know whether or not you can consolidate, you should carefully consider whether or not you should consolidate. The two are not one in the same. While you may be able to consolidate your student loans, it is not always a good idea.

One of the situations in which consolidation may not be a good idea is if you have a Perkins loan. Perkins loans have a lot of benefits for the borrower. If you consolidate your Perkins loan, you will lose those benefits. The loss of the benefits may end up being more destructive to your repayment period than the consolidation benefits.

You also need to know that, by consolidating your loans, you are resetting the loan term. In most cases, this means more interest paid on the life of your loan. If you have already paid a good portion of your student loans, the consolidation of them may not be worth the extra interest expense.

When Consolidating is a Good Idea

Consolidating loans for students can often be a good idea, especially right after graduation when you are nearing the end of your grace period. By consolidating multiple loans into one loan, you can simplify your loan payments. You can also receive a lower monthly payment on your consolidated loan than you would have with each individual loan. This, too, can make your payments easier to manage.

If you are struggling to make your monthly payments or are having a hard time keeping track of all of your loans but you did not recently graduate, consolidating might be a good idea as well. This can help you get back on track before you start experiencing the damage of defaulted loans.

Another reason that may make consolidation a good idea is a significant life change like marriage or the birth of a child. Carefully consider if you will be able to make your loan payments as they currently are and, if it seems that you may not be able to, consolidating may be your best option.

How to Approach Your Consolidation

Because consolidating your loan means that your repayment schedule is started over, you will usually have to pay more interest over the life of your loan. For this reason, you should choose the shortest loan term possible. While this may seem like a bad choice because the monthly payment will be higher, it is actually a good choice because it means that you will pay less interest over the life of your loan.

Also, shop around for your consolidation loan. Different lenders offer different benefits and loan terms. Since this is a long term commitment, you should approach it like you would a home or car purchase. Find the lender that fits your needs – both currently and in the future – the best.

How Unsecured Debt Consolidation Loans Work

When you receive an unsecured debt consolidation loan, you are taking all of your debts – which are usually short term loans, credit card debts or even private student loans – and putting them all into one loan. This enables you to make one monthly payment to one lender instead of sending out multiple payments each month. This eliminates the need for juggling loans and it can seem like a way to better manage your finances, but as you will learn, deciding to take out an unsecured debt consolidation loan is a lot more complicated than it may seem.

Unsecured vs. Secured

Since the loan is unsecured, you do not need collateral for an unsecured debt consolidation loan. Instead, your approval is based on different factors like your income, your credit and your payment history. This can have both advantages and disadvantages.

The advantage of having an unsecured loan over a secured loan is that you don’t have to worry about losing your collateral, should you default in your payments. Not needing collateral, however, does not mean that it’s okay to default on your loan. You will still have consequences, should you fail to make your payments on time. This can include damage to your credit as well as wage garnishment, should you stop making your payments altogether.

The biggest disadvantage to choosing an unsecured debt consolidation loan over a secured consolidation loan is the interest rate. Interest rates for secured loans are significantly lower than the rates for an unsecured loan. This is due to the fact that, with an unsecured loan, the lender must take a higher risk when extending you credit.

Difficulty in Getting Approved

Getting approved for an unsecured loan is a lot more difficult than some people may realize. Not only is your credit a factor, so is your previous payment history, your job status, your income level and your other financial responsibilities. All of these factors are used to determine if you can be extended a line of credit. Some of these factors will also impact your loan terms.

Understanding the Impact of Interest

Some individuals assume that the interest rate for their consolidation loan is a trade-off for the lower monthly payment but this is rarely the case. In most cases, you will pay more over the life of your consolidated loan than you would have, had you kept your previous creditors and worked on a better plan for managing your payments. This is often missed by individuals that apply for a consolidation loan. They only see the lower monthly payment.

What you must realize, however, is that the higher payments you were making on your previous loans meant that you didn’t have to pay as much interest over the life of the loan. It also meant that you didn’t have as long of a repayment commitment. A consolidation loan is a long term commitment – one you should not take lightly.

Not an Answer to Credit Problems

One of the biggest mistakes that individuals make when considering an unsecured debt consolidation loan is assuming that it is an answer to their credit problems. While it is true that having one payment is easier to manage than multiple payments it still takes discipline – better money management and budgeting – to make debt consolidation effective. If you don’t practice new methods for handling your monthly expenses, you will end up right where you started – behind and struggling to make your payments.

Learning How to Manage Your Credit

The purpose of a debt consolidation loan is not to free up your money so you can find new ways to get more credit – that’s often what lands people in trouble. New ways of handling your finances can help you learn how to effectively manage your debts and your monthly expenses. This will help you stay on track with your new loan. It will also help you stay out of trouble, once you start to rebuild your credit.

A few places that you can learn better money management is through online tools and even financial classes. While these tools may seem like a waste of your time, keep in mind how important it is to learn how to effectively manage your credit and monthly expenses. Use your debt consolidation loan as a way to have time to learn more about budgeting, about financial plans, about savings plans and about paying your bills on time. If you do this, you will soon be on track to a better credit and financial status.

Why Graduates Consider Private Loan Consolidation

Paying back multiple private loans can be a hassle. You have to keep all of your payment schedules straight and late payments can occur. Another reason that graduates may consider consolidating their private loans is to reduce the amount of their monthly payments to make their loans more financially manageable. Lastly, graduates may consider consolidating their private loans because they have already defaulted and need to find a way to get back on track.

How Does Private Student Loan Consolidation Work?

If you choose to consolidate your private student loans, your new lender will purchase all of your old loans, often at a discounted price. You are then given new payment terms. You are now bound to one lender for the life of your loans, unless you choose to transfer the loan at another time.

Is Consolidation Possible?

Graduates with private student loans are able to consolidate them. You should be aware, however, that there are many factors that go into considering the term of your new loan as well as your approval. Having a private student loan does not automatically make you eligible for consolidation.

Not Without Disadvantages

While consolidating your student loans seems like the answer to your troubles, you must be aware that private student loan consolidation is not without its disadvantages. Your new loan terms may allow you to make a lower monthly payment but you will usually have to pay back more interest over the life of your loan. If you have bad credit, your interest rate may be higher with your new loan than it was with your previous loans. If you are behind too far on your loans, you may find that you are not eligible for consolidation until you are caught up.

All of these disadvantages should be carefully considered before stepping into a new loan. Don’t be blindsided by the short term benefits. Carefully contemplate how the consolidation will affect your life in both the short term and long term aspects.

When is Consolidation a Good Idea?

There are many cases in which private loan consolidation might be the best answer. Some examples could include the need for a lower payment because of an income that will be lower temporarily. To avoid paying excessive amounts in extra interest, you can always pay more on your loan once your income increases. Just be sure to check for any early payoff penalties.

Consolidation may also be a good idea if you are struggling to keep up with your payments but haven’t been grossly tardy. This can make your payments more manageable until you can either secure a better paying job or cut back on some of your monthly expenses. Again, just be sure to increase the amount you pay as soon as you can to avoid excess interest charges.

The last reason that you may want to consider private student loan consolidation is if you have had a dramatic increase in your credit worthiness. This could save you a great deal of money, despite the few minor setbacks, especially if you request that your monthly payments stay the same.

When is Consolidation a Bad Idea?

Just like there are instances in which a consolidation is a good idea, there are also times in which you should search for options other than loan consolidation. One instance would be if you have had some credit problems since you secured your original loans. Not only will you receive a hike in interest rates, you may also find it more difficult to secure a new loan.

Long term effects may also make you think twice about private loan consolidation. If you don’t see any future job advancements or you expect that you may marry in the future, you may want to avoid consolidation. These factors can reduce the amount of money you have available in the future for your loan payment and it would be better now to make higher payments to shorten the life of your loan.

Finding the Right Consolidation Lender

If you decide that private student loan consolidation is right for you, make sure you take the time to comparison shop. While there are fewer lenders today than there were ten years ago, they do still exist and they all offer different terms and conditions. Shop around and find the right consolidation lender for your needs for today and for the future. Most of all, think long term because, whether you consolidate or not, you have a long time before your loan will be paid off.

What is a Secured Debt Consolidation Loan?

A secured debt consolidation loan allows you to take certain debts and roll them all into one loan. This enables you to make one monthly payment to one lender instead of numerous monthly payments to multiple lenders. This can make paying your debts off a little less confusing but it does come at a cost.

To obtain a secured consolidation loan, you must have collateral. This collateral must be something that is of value. Homes are the most commonly used type of collateral. Should you default in your loan, the lender can foreclose on your home, leaving you in a difficult situation.

Benefits of Secured Over Unsecured Loans

While there is a risk of losing collateral in a secured loan, it is often the consolidation loan of choice. This is because interest rates are generally lower with consolidation loans. Because the lender has collateral, they are taking less of a risk by lending you money. Their reduced risk means savings for you on the life of your loan.

It is also easier to get approved for a secured loan. Again, this is because the risk is lower for the lender;. They are able to extend credit to people with not so perfect credit because they know that, should you default, they have a backup source for retrieving their investment.

How Secured Loans Can Damage Your Credit

If you are planning on using your debt consolidation loan to pay off credit card debt, you can significantly damage your credit score, particularly in the short run. This is because, by closing out your credit card, you are showing an inability to effectively manage your credit. This drops your credit score. While you may be able to recover from this in time, it will not happen overnight. This is an unexpected situation that many individuals seeking a secured loan are unaware of.

Beware of Loan Sharks

Not all lenders are honest. Some may use illegal practices to secure your loan, placing you at serious risk. If you are looking for a secured consolidation loan, make sure you take the time to find a reputable lender. Check their Better Business Bureau rating and check online forums for complaints before ever obtaining a loan with a lender.

Improving Your Credit Before Obtaining the Loan

Currently, a good credit score is considered to be 720. At this score, you can receive much better interest rates. There are many lenders, however, that will still offer you reasonable interest rates if your credit score is above 650. If you are below 650, you have a low credit score.

If you have a really low credit score, you may want to find a way around the consolidation loan, at least until you can increase your credit score. This is because, should you be approved for the loan, despite your bad credit, you will likely receive a higher interest rate on the loan than you would have with a better credit score.

Using Debt Consolidation to Increase Your Credit

Some companies will try to fool you into thinking that you can increase your credit score with a consolidation loan. While this may be true in the long run, especially if you make all of your payments on time, this is highly unlikely. This is especially true if your consolidation loan is your only form of credit. Your credit score is affected by a number of factors and one loan cannot change your score completely.

Using Online Lending Tools

Online lending tools  allow you to input all of your information, including the loan amount and the amount of debt you want to put into the loan. These tools compare your information to lenders all over the country. Once the data is compared, the tool is able to determine which consolidation lenders are best for you. You will then receive a call from the matching lenders.

This has both advantages and disadvantages. On the advantages side, it does help you find the best rates quickly and easily. On the disadvantages side, however, you may get tired of being called by the multiple lenders since some of them can call up to three times per day.

No matter your reason for choosing a secured consolidation loan, great consideration should be made on a number of variables and factors. Failure to do so can result in serious consequences. For those that take the time to understand consolidation loans, however, it is the wisest decision they have ever made.

Credit Card Balance Transfer

If your credit hasn’t been dramatically damaged from your problems with credit card debt, one option that you may want to consider is a zero balance or low interest rate credit card balance transfer. These cards allow you to consolidate all of your credit card balances onto one card and they offer you a low or non-existent interest rate for a short period of time. During this time, you can work on paying off your credit card debts before the introductory interest rate period is over.

When looking into balance transfer options, it is extremely important that you are careful in your credit card selection. Compare all of your credit card options before actually applying. Each time you apply for a new card, you take a hit on your credit rating.

Be careful to read the fine print before transferring all of your current credit card balances to a new credit card. While the introductory interest rate may be helpful in helping you better manage your credit card debts, you must also realize that there are other fees often associated with these (as well as any other) credit cards. Annual fees, balance transfer fees and over-the-limit fees can quickly rack up and land you right back in the same situation.

Credit Card Consolidation Loans

Consolidation loans work differently than credit card balance transfers. In a consolidation loan, your new lender will assume your credit card debt and you will now be responsible for paying the lender for the fees they incurred to purchase your debt. This is your line of credit. You then receive an interest rate on the line of credit. Interest is assumed from the moment the loan is secured.

Assuming an interest rate from day one may seem like a bad thing but you have to look at a consolidation loan from all angles. While you do pay interest right away, you also have a set repayment schedule. This could help you manage your debt more effectively. You will also have a longer repayment period with a consolidation loan than with a zero or low interest credit card.

The drawback, however, is that consolidation loans are a long-term commitment. It is harder to get approved for a consolidation loan and many consolidation companies will require collateral – like your home – before they can extend a line of credit. While unsecured consolidation loans do exist, they have a higher interest rate, are harder to get approved for and are more difficult to find.

Debt Consolidation Companies

Debt consolidation companies are very different in their approach to helping you manage your credit card debts. These companies are generally non-profit, but not always. They work as sort of a liaison between you and your credit card companies. They contact your credit card lenders and talk to them about your situation. They will try to get them to reduce your interest rates, sometimes eliminating the interest rate altogether.

Once they have negotiated all of your debts, they will then take control of your payments. They will distribute your payments to your various creditors until all of your credit card debt is completely paid off. While this is not a new loan or a new credit card, consolidation companies are another way to reduce and simplify your monthly payments.

Be careful, however, with this method of consolidating your credit card debt. Skews of debt consolidation companies have surfaced over the years and not all of them are honest. Additionally, some companies do not hold to their end of the deal. Many individuals have found themselves in an even worse situation than when they started, due to the illegal or illegitimate practices of debt consolidation companies.

How Debt Consolidation Can Actually Damage Your Credit

If you clear all of your credit card debt and do away with all of your credit cards, closing the accounts as they are paid off, you may be in for a big surprise when you see your next credit score. If you are like most people, you assume that your credit score would increase because all of your debts have been paid. This, unfortunately, is not the case.

Your credit score is based on a number of factors, including the length of time you have had an active account. By closing out your credit cards, you are showing an inability to manage credit. This will negatively impact your credit score. Credit specialists recommend learning how to be responsible with credit and have only a couple of credit cards that you use regularly and pay at least the minimum balance on. If you decide to go this route, you may want to consider keeping the credit cards that you have had the longest. This will help lessen the blow to your credit rating.