Poor credit can create a struggle for many things. From getting a mortgage, personal loans, or even a consolidation loan to pay off debt – It can be hard to get approved. We’re going to cover consolidation loans and poor credit today.
What Exactly is a Debt Consolidation Loan?
Debt consolidation is usually used to combine a lot of smaller debts into one payment. It is typically unsecured, meaning there is no collateral for it, and how much you have to pay depends on how much you borrow. It’s usually called a closed line of credit, meaning they give you basically a check for a certain amount. You should use that check to pay off in full all the smaller accounts that you have.
What to be Careful Of
One thing to be very careful of doing is that once you get the consolidation loan and pay off all the smaller credit card accounts, that you don’t run up balances on those accounts again. By running up the balances again, you would have that payment on the consolidation loan and the payments on your credit cards again, which may put you in a tougher financial situation. What you should consider in getting a consolidation loan is if you have a lot of small accounts that can be consolidated and what interest rate you end up with. That interest rate is going to be determined by your credit score.
What to Consider With Your Credit Score and Interest
If you have a lower credit score, there will be fewer places that will approve you for that loan, so you may want to find a co-signer, that way the strength of the co-signer’s credit score can help you get a more reasonable interest rate. If the interest rate on the consolidation loan that you can get approved is higher than the interest rate on the original debts that you plan to pay off, it may not be the best financial move to do the consolidation loan. Because the higher the interest rate, the more you’re paying for that credit and the longer it will take you to pay it off.
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