Debt Consolidation Loans For Bad Credit Management: How Effective Are They Really?

Monday, April 21, 2014
The biggest problem with missing a single loan repayment is that over just a short time, with fines and charges, the sum can become extremely high. For those facing large debt repayments each month, this is a major problem. But the availability of debt consolidation loans for bad credit borrowers means there is a way out.

But just how effective is consolidating existing debts and taking out another loan to repay them? Is it not simply a case of replacing a set of crippling debts with one single crippling debt? Or is there sound reasoning behind the strategy? After all, there are other options to consider too.

We take a look at some of the factors that answer these questions, and establish that taking out a debt consolidation loan really does provide a practical solution to the problem of meeting debt repayments that are just too large to manage.

Understanding The Mechanics Of Consolidation

Before addressing the questions, however, we should look at how consolidation works. By definition, consolidation means bringing resources together in order to strengthen a position. In financial terms, that translates to combining all the different loan balances in order to manage them better. This is exactly the purpose behind applying for a debt consolidation loan for bad credit management.

The reason why this is done? Well, it comes down to fact that clearing separate debts in full with a single debt creates a much more manageable financial situation. This is because individual loans have differing terms, like interest rates, repayment schedules etc. If there are 5 loans, then there are 5 dates on which to make a repayment, and 5 interest rates charged, complicating the whole situation.

By consolidating existing debts this complexity is reduced to a single repayment that is easier to focus on. And with a single debt consolidation loan to face, there is a single interest rate that ultimately means less interest is paid and a single repayment structure to worry about.

Why Replacing Debts Works?

But how can replacing the debt work? How can the financial pressure be alleviated? The fact is that, when securing a debt consolidation loan for bad credit management, the debt is being restructured. This in turn means the pressure is alleviated, but only if the terms are right.

For example, the most important factor to consider when consolidating existing debts is the term of the loan deal. The key reason for financial pressure is the size of the repayments each month. If the size is reduced, then the pressure is lessened.

When taking out a debt consolidation loan, the length of the loan term decides the size of the repayments. If the total sum is $45,000, then a 10-year term means monthly repayments of around $400. Over 20 years, it would be a mere $200. In contrast, the existing structure could have combined monthly repayments on 5 individual loans as high as $1,000, placing extreme pressure on the borrower.

Other Advantages To Consider

So, what are the other advantages that should be considered, especially when compared to the alternatives? Well, the first alternative is to declare bankruptcy, thus removing the pressure created by debt completely. But there is the consequence of a black mark against your credit for as long as 2 years.

Getting a debt consolidation loan for bad credit management means all debts are repaid in full, leaving no reason for any negative consequence. In fact, the credit score improves instead and worsens because as far as your credit report is concerned, the debts were repaid.

This means the terms on future loan deals can be better, ensuring consolidating existing debts is the most beneficial method to clearing debts - as long as the terms of the debt consolidation loan are right.