How Bad Credit Debt Consolidation Loans Work

If you are like many Americans, you may be considering a bad credit debt consolidation

loan as a one way of organizing all of your current debt commitments. You're not alone if you find yourself with growing concerned over the amount of personal debt you've accumulated.

The good news is that if you're looking for a consolidation loan, the chances are you realize that you need to take more control over your debt. Keep in mind that consolidation loans are a pretty big step and you should make sure that you've got your spending under control before seeking out this kind of loan.

Personal Bad credit debt consolidation loans

There are quite a few advantages of bad credit debt consolidation loans, but you need to understand that the commitment on these loans is very different from those of outstanding credit card bills or the balance on a credit card. By taking all of this debt and organizing them into a consolidation loan, you are removing all of the risk associated with default on each of those individual loans (credit on any card is essentially an unsecured loan) and putting them all in one place - the consolidation loan.

What happens in this process is that all of the smaller risks of default that each merchant or creditor has with you are now transferred to this larger personal loan. Lenders writing of these loans desire to make sure they are protected in some way for assuming all of this risk. That is why bad credit debt consolidation loans are normally secured loans with collateral - most likely your home or some other valuable asset. We'll talk more about this later.

Lower Interest rate Loans

Probably the single biggest advantage a bad credit bad credit debt consolidation loan offers consumers is lower rates of interest. Lenders can afford to offer low rates because the fixed costs to administer the loan, such as processing the application, can be spread out over the larger dollar amount of these loans.

In addition, most consolidation loans are secured loans, meaning that the lender has recourse in the event of default. A secured loan lowers the overall risk to the lender and allows them to offer relatively low interest levels to the consumer.

Monthly Debt Payments

With a larger number of smaller loans, you also need to be more careful in managing your payments to each lender. As an example, if you're used to making minimum payments on a credit card, you need to make sure you've got the minimum covered each month or run the risk of penalties or bad marks on your credit history.

A bad credit debt consolidation loan pays off all those smaller loans so you don't have to worry about minimum payments or calls from three or four collection agencies when you've missed something. All you need to focus on is paying the one loan each month.

Another advantage of having one monthly payment is that it allows you to see just how much money you owe various creditors. Most people intuitively understand that they've got a lot of debt, but until someone adds it all up, they might not realize the amount of debt they really have.

Credit Reporting

We alluded to this earlier when we talked about tracking all those individual payments you need to make to each creditor. Almost all credit cards report an individual's payment history to credit reporting agencies. If you're missing monthly obligations on some of those credit cards, then you're probably affecting your credit report negatively.

A consolidation loan makes it easier to manage your monthly payments and should help you maintain a better credit score. That's important when you're trying to get a car loan, mortgage or personal loan.

by: Adam Morris

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