Debt Consolidation Loans and Poor Credit
A big concern for people looking into Consolidation Loans is the relationship between the loan and their credit. Unlike other debt solutions, a debt consolidation loan can not only affect your credit score, but your ability to take out the loan can also be affected by your current credit score. This is an important aspect to think about when you are considering a debt consolidation loan.
The Effect on Your Loan
Just like any loan, a lot depends on your credit score. Your credit score is a number which tells lenders how financially stable and responsible you are. It is affected by payments on credit cards, loans and bills, how often you change your address, being on the electoral roll, and a huge number of other factors. Many people think that they can have a great credit score by never taking out any credit. This isn’t true. If you have never taken out any credit, lenders can see no proof that you are financially responsible and they are less inclined to trust you.
To have a great credit score, you need to be paying off your credit cards, loans, bills, rent and other financial costs promptly every month. Missing or defaulting on payments, changing address often, having court orders, and other signs of instability can make your credit score very poor. Most people who are struggling with serious, problem debts will have a bad credit score as they are more likely to have missed payments. This can make taking out a Debt Consolidation Loan very difficult.
A bad credit score is likely to mean that you will have a higher interest rate attached to your loan. This could make the monthly payment on your new loan higher than all your previous monthly payments combined. It is also possible that, if your credit score is low enough, you won’t be able to take out a loan at all.
The Effect on Your Credit Score
If you are able to take out a consolidation loan, however, one of the greatest advantages of a consolidation loan is that, when used correctly, it can improve your credit score while paying off your debts. To do this, you need to adhere to your monthly repayments strictly and not miss any payment. If it is possible as part of the loan agreement, you might even want to try to make extra early repayments if it is possible. You must also keep up on any of your other ongoing payments, such as your mortgage, rent, bills and taxes, however, or you won’t feel the benefit. This makes the consolidation loan a good option for people who want to be able to get a mortgage, or another financial plan dependent on credit score, after they have cleared their debts.
As already mentioned, however, debt consolidation loan repayments are likely to be more expensive in total than the debts you have paid off due to the interest that is being added, so most people in debt may struggle to meet the monthly payments. There are a lot of other positives and negatives to consider before you commit to any one debt solution. It can be a good move to use the loan to pay off priority debts, such as mortgage and tax arrears, that can result in serious consequences, such as homelessness, if you don’t pay them. However, you might be paying more overall, and over a longer period of time, than you have to. There is a debt solution for every situation, make sure you review all your options and make the best decision for you. You can learn more about debt consolidation loans here.