Before you consider using loans for people with bad credit to consolidate your debt, there are a number of factors that you need to be aware of:
1. Understanding Debt Consolidation
Basically, debt consolidation involves adding together all the amounts you owe to creditors (loans, lines of credit and other debt) into one amount, applying for a new loan in this amount and then using the funds to settle your debt with your existing creditors.
The aim of debt consolidation is to minimize your monthly repayments to make them more affordable into one easy monthly payment. To do this, you need to contact your current creditors and request a lower settlement amount and ensure that your consolidated loan will charge you a lower interest rate.
Every loan or form of credit your have will charge you a specific interest rate. Interest rates vary depending on the loan provider and the type of loan that you apply for. Loans for people with bad credit often have much higher interest rates than regular loan providers.
Considering that the aim of debt consolidation is to lower your repayments and overall debt, a bad credit loan may mean that you are in actual fact paying more for your loan than you would have if you did not consolidate. It is important to make these calculations to evaluate what the difference will be.
3. The Term Of The Loan
The term of a loan is the period over which you need to make monthly payments in order to settle your debt. The longer the term, the lower your repayment will be but the more you will pay in interest.
Most bad credit loan providers only offer short term loans that need to be repaid over a period of 3-6 months. These type of loans are therefore not ideal for consolidation as the loan amount calculated over a short term may make the repayments unaffordable.
On the other hand, a shorter repayment period means that you are paying less interest. So if your repayments are affordable over a shorter period, this is the best route to settling all your debt very quickly.
4. The Loan Amount
Bad credit loan providers often don’t approve facilities for large amounts of money. If your debt consolidation exceeds the amount that the loan provider is prepared to offer, this may not be the ideal debt consolidation loan.
However, you can lower your required loan amount by consolidating only some of your debt at a time. The lower the loan amount and shorter the repayment period, the faster you will be able to repay some of your debt to enable you to start servicing other debt.
5. Your Credit Record
Consolidating your debt is a good way to clear your credit record quickly. However, you need to be aware that your new loan will affect your credit rating. Ensuring that you make all your payments on time and in full, will help you maintain a good credit rating.