John E. Pytte
What You Should Know About Debt Consolidation Loans...
Debt consolidation is a way for a person to refinance their debt. This is a loan designed to be used to pay other existing loans. The goal is to obtain a lower overall interest rate as well as a lower monthly payment. Depending on a person's circumstances, what sounds like a great idea could actually put borrowers at a serious financial disadvantage.
Bad Spending Habits Remain
It's been proven that a person can't borrow themselves out of debt. When an individual has a debt consolidation loan, they are not dealing with the issues that caused their high debt. The spending behavior that is responsible continues. Nothing is learned, and habits do not change. Individuals will continue down a path of spending too much and undersaving. Without a change in spending habits, this type of loan could do an individual more harm than good.
There are a variety of financial institutions that offer debt consolidation loans. Finance companies have less strict credit requirements when compared to traditional banks. Their interest rates are known to be very high. Many local banks offer some type of consolidation loan. These types of loans are often only offered to individuals with an excellent credit rating. There are credit unions, who may offer consolidation loans at a good rate and with good terms for their members. Payday lenders provide consolidation loans and don't require a credit check. These loans often come with very high interest rates with a short repayment window. They are not recommended for individuals with large amounts of debt.
Secured Consolidated Loan
A person who wants a consolidation loan may be tempted to provide collateral. Individuals may provide their homes, boats, cars and more as collateral for a consolidation loan. This makes the loan easier to get approved since it will be considered a secured loan. It is also common for these types of loans to have a higher interest rate. If they do have a lower interest rate, an individual may still end up paying more interest because the loan will have longer terms. With a secured consolidated loan, a person may be putting some of their most valuable assets at risk.
Unsecured Debt Consolidation Loan
In order for a person to get this type of loan, they will have to have excellent credit. Most people who are in need of a consolidation loan will not qualify for one that is unsecured. In many cases, it results in a monthly payment that's not low enough to change a person's financial situation. The reason is there will be a variety of fees associated with getting this type of loan.
It is possible a person could damage their credit rating. An individual could take out a number of loans when they have good credit. If their credit rating goes down and then a consolidated loan is obtained, they will still have a lower credit score. A lower credit score could also impact the interest rate offered with the loan. When a person closes out old credit accounts to open a single new one, it will reduce the total amount of credit they have available. This will increase a person's debt-to-credit utilization ratio. This is viewed as a person borrowing a large percentage of the amount of credit available to them. Many credit bureaus will view a person in this situation as less financially stable.
No Financial Improvement
It's possible for a person to obtain a consolidation loan and have their financial picture not change. This puts them in a very difficult situation with limited options. Individuals may struggle to keep up with payments through no fault of their own. It is possible for lenders to eliminate penalties with a raise in interest or a loan extension. A person may find themselves in a worse financial situation than before they took out the consolidation loan.
Georgia Debt Relief is here to help. Contact us to share your story and see what kinds of options you have that may not have occurred to you. Our expert associates have the experience necessary to get the best possible result!