If used the right way, a debt consolidation loan would help a lot in managing your credit and fixing your financial issues. This could help you avoid getting your property repossessed or foreclosed. Aside from that, this is also an excellent way to prevent your credit score from dropping because of late payments and charge-offs.
Get rid of a high-interest debt
On average, credit card companies charge 15 to 18 percent monthly interest. For car loans, the interest rate is, usually, one to seven percent. This is a hefty amount if you calculate the total annual interest rate.
If your credit rating is terrible, your interest rate for any of these two will be higher than the norm. The interest rate of your credit card could be more than 25% while your car loan interest could be 10%. Through debt consolidation negotiation, you may be able to reduce these amounts. You’ll be able to pay them off using a lower interest rate loan and save some cash.
Lower monthly payment
A big part of many people’s monthly budget goes to consumer debt aside from their mortgage. Most of the time, people only make a minimum payment on their credit card, which is usually just a little more than the monthly interest. Because of that, the principal balance only gets very little payment.
If you pay off your debt using a debt consolidation loan, your monthly payment could be reduced. Your new monthly balance would be less than what you’re originally paying. Sometimes, debt consolidator can also negotiate to reduce your balance, which means that you’ll owe less.
If you don’t qualify for a loan, your debt consolidator can come up with a plan on how to effectively settle your debts. They could also negotiate to lower your monthly interest rate so that you’ll be able to pay more on the principal. This way, your debt will lessen more significantly as you make your monthly payment. You’d also be able to use the cash that you saved to pay your other debts.
Debt problems hurt credit score, which is used to calculate your creditworthiness. Those with credit problems usually make late payments that incur a fee. These fees would add up over time and would make it harder for the debt to be settled.
Credit agencies keep track of these late payments. These late payments have an adverse effect on the credit rating. If you choose not to pay your bill altogether, this will result for your credit score to drop. Your account will also get charged-off, and you’ll get reported to credit reporting agencies.
The record of your late payment and charge-off will stay for the next seven years. If you’re taken to court and the result goes against you, this will remain on your record for ten years. This would not be good, primarily because credit rating would determine your buying power for significant purchases like car, house, or loan.
Your debt consolidator could help your bill to be reported as paid, which means that the impact to your credit score will also be reduced. As you pay off your debt over time, you’ll be able to recover on your credit score.