When you have multiple debts, it can be difficult to effectively manage your finances. This problem may result in you failing to make payment on time, which damages your credit rating. You may not appreciate the amount of interest you’re paying on your car loan or charge card. Even if you’re well organized, it’s still tough trying to manage all of your credit. There is an alternative.
How does debt consolidation work? This involves taking out a secured or unsecured loan to pay off all of your credit obligations. Instead of making different small payments to multiple creditors, you’ll make one payment every month instead. The borrowing cost will be determined by how you’ve managed your credit commitments in the past and the amount of equity you have in your home.
If you have a minimum of fair credit, you may be able to get an unsecured loan for debt consolidation from a peer-to-peer lender, such as Lending Tree. You can get a loan for as much as $25,000 on an unsecured basis for the purpose of debt consolidation. If you have a poor credit score, debt consolidation can only be achieved with a loan against your home equity.
Home equity is defined as the value of your property minus the mortgages and loans that are secured against it. You’ll need to prove to the lender that you can afford the repayments. Most people find this quite easy because they don’t have to make repayments on other credit agreements. If necessary, you can add months onto the loan to enhance affordability.
Extending the repayment term aids affordability, but there is a downside. Your monthly repayments will be lower, but extending the term increases the cumulative interest that you’ll pay on the loan. Most lenders advise their customers to pay over the maximum term, but you should attempt to minimize the timeframe. You may be able to extend the term of the agreement in the future.
A common mistake is leaving your old credit agreements active and creating new debt. It’s very easy to accrue debt on your credit card. If you fail to pay these at month end, you can end up back where you started. Although closing down existing credit agreements has some implications for your credit rating, it’s better than ending up knee deep in debt again.
The main issue with consolidating your debt with a secured loan is that it gives your creditors more power to get their money. If you fail to comply with the terms of the agreement, the lender can take legal action to repossess your property. You must remember that you do have other options, such as a debt relief solution. It has negative implications for your credit rating, but you won’t be risking your home.
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