This debt consolidation FAQ aims to provide answers to some of the more common questions. This will help a debtor to establish whether a secured homeowner loan, unsecured debt consolidation loan or a debt relief program provides the right option for their personal circumstances.
Debt Consolidation and Its Benefits?
Consolidating debt involves paying off unpaid credit card debt, small loans, medical bills, repossession deficiencies and other debts with a loan and making a single repayment each month. The main benefits of a loan to consolidate debt are a more competitive interest rate, lower repayments, a defined repayment term and easier to manage personal finances.
What if the Borrower Has a Low Credit Score Rating?
An unreliable repayment history (missed payments, account delinquencies, bankruptcy etc) will either increase the cost of borrowing or mean that consolidating debt is not possible. A low FICO score may mean that refinancing is more expensive than existing forms of credit. It could be possible to reduce the cost of borrowing through a secured loan as the lender's risk is reduced through the provision of collateral.
Is it a Good Idea to Increase the Repayment Term?
Borrowers regularly choose to increase the duration of a loan for debt consolidation because spreading the repayments over longer means that the monthly payment will be reduced. However, increasing the duration also means that more cumulative interest increases. Debt consolidation companies regularly use the maximum term as a repayment model because it makes the deal appear more favorable.
Is Consolidating Credit Card Debt with a Secured Loan Sensible?
Unpaid credit card debt is unsecured which means that the creditor has fewer powers to recover their money in the event of default. Whilst a secured debt consolidation loan has a number of benefits, failing to keep up with the repayment schedule could lead to the repossession of the family home. It is sensible to apply for an unsecured debt consolidation loan, but the borrower will need a good credit score rating in order to get approval.
Is a Secured Debt Consolidation Loan Always Possible?
The short answer to this question is no. Unless a homeowner has sufficient home equity, consolidating debt with a homeowner loan will not be possible. Home equity is defined as the difference between the market value of a property and the mortgages and loans secured on it. Falling house prices and deteriorating credit mean that fewer individuals now qualify.
Bad Credit Debt Consolidation Loan or Debt Relief Program?
Although a discussion of the full importance of credit score ratings is beyond the scope of this debt consolidation FAQ, a bad credit rating will have a huge bearing on the way someone should proceed. A debt relief program is likely to result in personal debt being cleared more affordably and in a fraction of the time without having to put up a property as collateral.
Whilst this debt consolidation FAQ provides many of the more common answers to questions about consolidating debt, it is important to consult a suitably qualified advisor before proceeding. Bad credit debt consolidation loans are available, but it will normally be necessary to provide collateral in order to achieve a reduction in monthly repayments.
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