With these loans, an individual can pay off their existing debt and have one monthly payment and usually a lower interest rate. These loans are very popular; however, such a loan may negatively affect an individual’s credit score in the short term.
This impact is minimal once you consider that the goal is to be debt free. A debt consolidation loan can help an individual achieve their goals providing that no further debt be incurred. It requires a solid commitment toward a debt free lifestyle, living within one’s means and no longer using credit cards.
Debt Consolidation Loans and Credit Scores
Credit scores often drop due to the amount of inquiries that are made into an individual’s credit history. All inquiries are documented in the report.
Depending on the amount of inquiries during a specific period of time, the credit score can be lowered by as much as 10 percent. The inquiries remain on the credit report for as long as two years and have an adverse impact on the credit score for approximately six months.
This impact is insignificant if an individual is committed to becoming debt free.
Lowered Credit Score
The lower credit score is only a temporary impact and as debt is reduced, the score will begin to increase. The lowering of the reported debt on an individual’s credit report will offset the initial reduction of the score.
The credit score will further be impacted once a loan has been approved. This temporary drop is caused by having another open loan on the credit record.
This is a temporary drop and will increase rather quickly as the unsecured debts are paid off and the loan balance begins to decline. Anytime an individual obtains a loan or credit card, the score is negatively impacted.
Improved Credit Score
Over the long term, however, the score will begin to improve. This minor impact is temporary and will not last more than a year. This insignificant impact should not affect and individual’s decision to gain control of their debts through a loan.
Your Credit Score Will Rise Over the Long Term
Debt consolidation loans will have a positive impact on the credit score once all the unsecured debts are paid. The revolving balances on unsecured debt account for a third of the score calculation. As the balances are updated with the credit bureaus, the score will begin to rise.
In addition, the borrower will have one monthly payment at a lower interest rate and will be able to reduce the loan amount rather quickly. This will also cause the credit score to rise. Debt management is crucial and a debt consolidation loan is a long-term solution to becoming debt free.
Many lenders online offer debt consolidation loans with fantastic interest rates. Many will customize a loan to meet your financial needs and goals. The lenders will offer a much lower payment than you are probably paying on your combined credit card payments.
In addition, a lower over all interest rate will allow more money to be applied to the principal of the loan.
Secured And Unsecured Loans
There are two main types of loans you will apply for, secured and unsecured loans, but what do these mean?
Secured will mean you will have to have collateral against the loan in the form of your house or other asset of value. This is especially true for those with poorer or bad credit as it’s a safer option for lender and more risky for you.
Unsecured loans are usually for things such as credit cards and don’t require the borrower to place any assets towards the loan. They also usually have a higher interest rate however, as the lender will need to use this to cover any delinquent payments from non paying borrowers.
Debt Consolidation Loans For Bad Credit
If you have poor or even bad credit then the decision for obtaining a consolidated loan becomes a little more difficult. The issue arises over the fact that those with negative credit will have a tougher time getting approved but even when they do the interest rate can be quite high.
At that point you must calculate the difference in cost with this new form of debt to make sure the increased interest rates don’t end up making your debt even more expensive than it once was. If you take too long to pay it off then you might be paying more than when you started.
Where To Get Them
There are many companies online that offer to consolidate your debt. As always, take time to do good research so you can find one with the options and rates that make best sense to you. The government is another place to look as they can offer these services too.
