It does not take long for debts to grow into something too great to handle. While some people will move quickly to file for bankruptcy to deal with such situations, it is not as wise a move as some believe. There are serious consequences, after all. The availability of debt consolidation loans for bad credit borrowers offers a more constructive solution.
Of course, in some cases, consolidation is not the answer, but before the problem of debt grows too great, consolidation can certainly help to achieve financial recovery. While clearing existing loans is the key point to the exercise, the method needs to be as effective and constructive as possible if the maximum benefits are to be enjoyed.
There are clear advantages in opting to get a debt consolidation loan to solve the problem. But as with all financial products, it is important to secure terms that ensure the new loan is affordable.
What Does Consolidation Mean?
Simply put, consolidation is where a number of elements are brought together in order to create a stronger situation. In financial terms, this means combining all the existing loan balances, and replacing them with a single loan debt. The idea is that, by getting debt consolidation loans for bad credit management, the pressure is lifted.
The biggest challenge when repaying debts is how to overcome the cash flow problem that debt inevitably creates. When there are 6 loans to repay, there are usually 6 different repayment schedules leaving little time for the debtor to catch breath. By clearing existing loans fully and in one go, just one repayment date remains.
And while the debt consolidation loan is in fact a debt, replacing 6 different interest rates with one means the cost of the debt is also lower. However, there are other important terms to agree too.
Why Bother With Consolidation?
The simple answer to that question is that it can turn things around quite dramatically. While it is true that getting debt consolidation loans for bad credit management purposes does not remove the debt (just replaces it), the terms of the new debt are much more manageable.
As a result, there is extra cash freed up to use for other purposes, if the monthly repayments are less than the combined repayments of the original loans. What is more, because the initial debts have been paid off in full, the credit score is vastly improved too, allowing for better terms to be secured on any future loans.
But, perhaps the best reason to opt for clearing existing loans through consolidation, and not through bankruptcy, is that there is no negative impact on your credit record. Bankruptcy usually means all or the majority of the debt is written off unpaid. However, through a debt consolidation loan the debts are repaid in full, so there is no black mark on your record.
Key Terms To Seek
So, what are the terms that should be secured to make consolidation the most effective possible? Well, with debt consolidation loans for bad credit borrowers, affordability is the key. And in that respect, interest rates and the loan term itself are hugely important.
Generally, online lenders offer the best loan deals, but some offer interest rates that are better than others. This is partly due to the fact the borrower has poor credit scores. However, it is the term of the loan that is the essential factor when clearing existing debts effectively.
Basically, the longer the term is, the more monthly repayments there will be. This means the principal sum is divided into more shares, which are smaller. So, a $75,000 debt consolidation loan repaid over 20 years is affordable, but over a 10-year period might not be.