Struggling with high unsecured debts is not easy for any individual or family. If you have $20,000 in unsecured debts, you have probably found that minimum payments are gradually getting harder to manage. While you might consider taking out a consolidation loan to solve the problem, you need to understand the challenges associated with the loan and the potential downsides that you are likely to end up facing.
How Loans Work:
When you are thinking of taking out a $20,000 debt consolidation loan, it is vital to understand how it works. The loan is not always what many men and women expect, despite the use of the word consolidation.
Taking out a $20,000 debt consolidation loan means that you are taking out a completely new debt. The new loan is used to pay back your unsecured debts, which often have a high interest rate contributing to the difficult minimum payments. After the other debts are paid with the funds from the loan, the $20,000 of debt has one monthly payment rather than several monthly payments.
Despite the fact that the consolidation loan seems simple in the method of using the funds, the reality is that in many cases the loan is not appropriate to the situation. The method of how it works is only the theory of how it should turn out rather than showing the difficulty of obtaining the new loan.
Difficulty Obtaining Loans:
Taking out a debt consolidation loan is not easy for most individuals. If you are struggling with your minimum payments and bills, you probably have a few recent missed or late payments on your account. Unfortunately, missed and late payments do have an impact on your credit score.
If your FICO score is less than 700, it is likely that you will either not qualify for a consolidation loan or that the lender will offer loan interest rates that do not reduce the current rates. The goal of consolidation is getting a reasonable interest rate so that your monthly payments are a little easier to manage.
If you do not have a high enough credit score due to recent late or missed payments, you will find that the ability to find an interest rate below the original rates is unlikely. In some cases, the offered interests rates might average higher figures than the original debts.
The FICO score is one of the major reasons that the loan is unlikely to provide the expected results, but it is not the only factor. You might also find that the current debts lead to limitations on your qualifications.
Credit history reports will show when your unsecured debts, mortgage and other loans make up a large portion of your monthly income. While turning to consolidation loans is often the result of struggling with your monthly payments, the lenders will not look favorably on providing funds to those who have a high debt to income ratio.
If you fall under the category of having a relatively high amount of debt like many homeowners, you will find that the lenders find your situation more risky. Depending on the lender and your FICO score, you might still qualify for the loan. Unfortunately, you will also have a high likelihood of unreasonable interest charges that do not help the situation.
Negotiating with Current Creditors:
Taking out a new loan to repay current high interest, unsecured debts is not usually the best course of action. It has the risk of building up more debts and in many cases will not help reduce the interest rate enough to help. Fortunately, you do have the alternative of consolidation and settlement by negotiating with current creditors.
Negotiating with the creditors will start the process of saving money. Professional negotiators will discuss the situation and ask the creditor to reduce interest charges while the negotiations are going through.
You will end up paying much lower monthly rates as a result of reduced interest and working with a professional debt relief company. The negotiations will then continue to try reducing the principle as much as possible and settling the account.
Settling the unsecured debts will result in saving as much as 50 percent or more on your current balance. While savings will vary, negotiation will help reduce the expense and make it possible to repay the lenders.
When the lender agrees, cash that was gradually saved during the negotiation process is paid to the lender and the remaining amount is forgiven. After settlement, a temporary reduction to credit will occur, but it is possible to start improving the credit information immediately after the accounts are all settled.
Debt relief does not require taking out a new loan. Consolidating and settling with negotiation will limit the risk of getting into a debt trap and has easier qualification standards. If you want to learn more about consolidation without a loan, call us today or fill out the form now.