Having second thoughts about the consolidation of your outstanding debts is normal. When you have a pile of debts to pay off, it becomes difficult to keep up with payments and stay afloat. Once you fall behind on payments, you will end up losing your credit score. Apart from that, your account will be sent to the collection agencies. This will have a far-reaching impact on your credit report. As a result, your chances of securing a loan at lower interest rates down the line will be bleak.
When juggling between multiple debts, you may be confused about whether to take out a new secured loan or consolidate your existing debts. It is not easy to come down on one side of the fence or the other because you will have to explore all options, and all of them come with certain drawbacks. An option that has advantages outweighing disadvantages is worth its weight in gold.
Is it a wise attempt to take out a secured loan?
First off, you need to understand what a secured loan is called. When you are juggling multiple debt payments, you may want to take out a new loan to use it to pay off your existing debts in one swoop. Well, it is easier said than done. Secured loans are long-term loans. Mortgages are an example of a secured loan. The repayment length of these loans is always more than five years, and they are subject to collateral. If you do not repay the debt, you will lose the collateral.
Undoubtedly, secured loans are more affordable than personal loans, but you must have a good credit history. A lender will thoroughly check your credit report and repaying capacity. Obviously, your payment capacity will be called into question because of indebtedness. A poor credit rating will lower your chances of getting approval for a loan at a low interest rate.
So, if you think that you will be able to save money on interest payments of a secured loan, you are all wet. As a matter of fact, you will end up with higher interest rates. Another important thing to note about secured loans is that you cannot use them for consolidation.
A lender must ask you a reason for borrowing money. Under no circumstances are you allowed to use these loans to pay off your existing debts.
Can a personal loan be a good choice then?
Some lenders may allow you to use a personal loan for that. As the repayment term for these loans is not more than five years, your chances of qualifying for these loans are slightly higher to pay off your current debts.
However, it is vital to note that a personal loan will be considered a new loan and interest rates will be charged based on your current financial condition. Not to mention, interest rates for personal loans are higher than secured loans and they will be even higher when your credit rating is already bad. The interest you will be paying on a personal loan will be higher than the cumulative interest you would be paying on your current outstanding debt.
Consolidation is a good idea if…
A debt consolidation loan is a good idea when if your credit history is up to snuff. Most lenders will decline your application if you have already fallen behind on payment and missed payments have been reported on your credit file. It is vital to talk to your lender before it is too late. Some people do not prefer consolidation because they think a debt management plan or an individual voluntary agreement is better.
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A debt management plan
A debt management plan is offered by a debt management company that negotiates with lenders to accept a reduced amount of money as a final settlement. The plan is aimed to provide you with a wiggle room to make payments quite easily. The repayment length can be between two and five years depending on how much you owe.
Every year, your financial situation will be tracked, and monthly payments can be increased as your financial condition improves. However, not all kinds of debts can be included in a debt management plan, such as secured loans, utility bills, and council taxes.
As long as you are on a debt management plan, you will have the least chance of getting approval for a loan, including loans for bad credit in the UK, and even after the settlement of the debt, the debt management plan will continue to show up on your credit report for six years.
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An individual voluntary agreement
An individual involuntary agreement is quite similar to a debt management plan. It involves an agreement between you and your lenders to make an affordable payment every month. Insolvency practitioners set up the agreement which is enforceable.
Bear in mind that the individual voluntary agreement will stay on your credit file for six years. Your chances of borrowing money will be absolutely nil down the line. You will also have your name recorded in the individual insolvency register. It will not only affect your credit rating but also your employability.
Now you know that both arrangements have their own pros and cons, so before deciding on any option, you should always carefully examine which option is suitable for you. Only you can decide whether a consolidation loan is a good idea.
If you are not sure whether you should combine all your existing debts, you should always reach out to an expert. Taking their help will make it easier to make a better choice.
The final word
When you are juggling with your existing debts, you should always consider your options and make sure that you choose the one that fits your needs. Consolidation might not always be a bad idea, but make sure that you will not end up falling behind on payments again.
If you do not know which option you should choose, try to get help from a financial advisor. They will let you know based on your current financial condition.
Source: blookets.co
