Bad debt consolidation is a necessary and often times worrisome consideration for most people. What you may not realize is that bad debts are costly the way they are. Many people have high interest rates applied to the loans. Others have over the limit fees, late payments, as well as other charges added to their accounts just about every month, which makes that minimum payment worthless.
What’s more, if you paid only the minimum payment on your debts each month, chances are good it will take 10, 20, or even longer to pay off the debt in full. Therefore, if you have bad debt, consolidation may be the best route for you to take.
What Happens With Consolidation?
There are various types of debt consolidation, but the most common way to consolidate your debts is through a new loan. When you use bad debt consolidation, you will use a new loan of some sort to repay the old debts you have. If you have a personal loan, three credit cards and a medical debt, these can all be wrapped into one new loan. The funds from the new loan will be used to pay off the old, so that you have just one new account to pay every month.
There are two ways to get bad debt consolidation loans like this. The first is the least expensive but the most risky. That is using your home equity to pay off the debts you have. This type of consolidation is a second mortgage or a line of credit on the value of your home. This is a secured loan because your home’s value is behind it. If you default on the loan, you could lose your home, which is why it is so risky.
Another option is a new personal loan, which would be an unsecured loan. These loans are less affordable because they have higher interest rates applied to them. In addition to that, they often are hard to get when you have bad credit. They are more risky for a lender to provide to you because any type of security does not back them.
How can a bad debt consolidation save you money? If you place all of your debts into one new loan, there are several ways to save. Hopefully, you will get a lower interest rate, which is a savings in itself. This will also stop all the late fees, over the limit fees and other costs added to your account each month. In addition, you can pay more than the minimum to get your bad debt consolidation loan paid off fast.