Debt consolidation is a type of loan that allows you to pay off other debts or existing credits by combining multiple debts to lower your monthly payments. With this process, you can combine all of your unsecured debts into a single monthly payment. Through the debt consolidation loans, consolidating debt can be done with more favorable pay off terms and in an easier way.
Before you know how debt consolidation loan works, you must be aware of what does debt consolidation means. People mainly take debt consolidation loans to decrease the interest rate on their debt. Though this loan reduces their monthly payment amount, yet not everyone can take this loan. Before you take this loan, you have to match some criteria. Although this loan could be a promising solution, it has many risks. If you have a low credit score, then a debt consolidation loan is not the right option for you. Better before you take this loan, get in touch with our expert debt help for free. In two different ways, debt consolidation can be possible. Both the process will allow you to pay off your debt payments into one monthly bill.
- One will offer 0% interest and credit card debt consolidation.
- With the second method, you can get a fixed-rate debt consolidation loan.
If you choose the first option, then you can transfer all your debts onto a credit card and pay the full balance within a selected period of time. With the second option, you can pay off your debts from the loan and later return the loan to the bank in monthly installments over a set term. Debt management is another terminology that allows you or a debt management plan provider to negotiate affordable payments with the companies you owe money to. Although debt consolidation and debt management are different from each other, both help in sorting out your debts. Our debt consolidation calculator can help you to get debt consolidation or debt advice.
Does Debt Consolidation Affect Your Credit?
In different ways, your credit can be affected by debt consolidation. It happens because of the options and the methods that you choose to pay off your debts. That is why before you select an option, you should be aware of the agreement and procedure. It is also important for you to check your credit score so that it does not make any bad impact on your credit card report.
So, if you want to know how debt consolidation affects your credit, then check out the below points.
1. While Apply for New Credit Applications
The first damage happens to your credit when you apply for new credit applications. If you want to get a personal loan, then your credit score should be good. But if the lender performs a hard inquiry on your credit, then it might lower your credit scores by a few points.
2. New Credit Account
When you open a new credit account, then it might lower credit scores temporarily. This is because your new credit card or personal loan seems as a new risk to lenders.
3. Lower Average Age of Credit
If you have an older credit account, then you can get benefits out of it. An older account means you are paying off your debts on time so your credit scores will rise. But opening a new account can lower your average account age which also may decrease your credit scores for a while.
Eager to Know More About Debt Consolidation?
If you need help or advice with debt consolidation, then our free online debt advice is all the time available for you. Here our experts have given some detailed information about the debt consolidation loan.
Should I Consolidate My Debt?
Consolidating debts can not be a good option for everyone. It is because you have to choose only one company to pay off your money. Every month you have to pay a large amount of money and over a period of time, this amount may increase. So, you must check whether you can afford such a huge amount. In case, you are already struggling to pay off your debt, then you will not be eligible for the debt consolidation loan. That is why before you go for this loan, check your income and spending as well as your ability for repayments. Check out more about how to manage your money by budgeting.
What is an Unsecured Debt Consolidation Loan?
For some consolidation loan, you have to secure the loan against your home. But unsecured debt means you do not need to do so. But if you are unable to pay off your debt, then your home can be repossessed. Even you can manage your debts or support your retirement plans by using a Home Equity option. Before that, you must consult an expert to get mortgage and equity release advice. Know more about secured and unsecured debt consolidation loans and your home.
How Does Consolidation Loan Hurt Your Credit Score?
If you pay off your debts on time, then your credit score will not be affected by a consolidation loan. But if you fail to repay, then it will be registered in your credit history and your credit score will be hampered.
Can Consolidation Loan be Taken With Poor Credit?
Record of missed payments and defaults, CCJS, IVA or bankruptcy are the indication of your poor credit. If you have such poor credit history, then you can take a consolidation loan but with higher interest rates. So, you should not take this loan.
Learn more about how debt affects a credit file.
Is Consolidating Debt Worth it?
Although a debt consolidation loan seems to be a good option, it is risky. That is why you must understand the claims and risks behind it.
|“Consolidate all of your debts into one place”||Most people choose credit over a debt consolidation loan. That is why they have to pay off debts to more than one company.|
|“Government debt consolidation”||Some companies claim that they offer the government debt consolidation scheme but actually, there are no such schemes available.|
|“Lower your monthly payments”||When you pay less every month, you have to pay off your debts for a longer period of time.|
|“Reduce Your Interest Rates”||If you have a lower interest rate, you might have to pay a higher interest rate with a debt consolidation loan. It happens due to the agreement of this loan that might last for a longer period of time. For a debt consolidation loan, your total interest rate can be increased.|
|“Manageable monthly payments”||Debt consolidation loans are not easy to get. Only if you maintain a proper budget and decrease your expenses, then you can afford this loan.|
Things You Must Remember Before Choosing a Debt Consolidation Loan
- Make sure you pay off your existing debts in full.
- Remove all your credit cards and undo all the old credit agreements in writing so that no one can tempt you to borrow more money.
- Before taking this loan, you must get free debt advice. There could be better options that will help you to deal with your debts.