A bad credit consolidation loan is a type of loan which people with below average credit scores use to pay off other loans. One large loan can offer some advantages over several small loans. It can be used to reduce your monthly payments, pay off money quicker and make budgeting easier, by having only one monthly payment leaving your bank account each month.
To use a consolidation loan to reduce your monthly repayments you will first need to add up the cost of repaying all your current loans, including any early repayment charges which you may occur. These and any other charges will be explained in the documentation you should have received for each loan. Then you will need to take out your new loan over a long enough period to ensure the monthly repayment is below that of all your current loans. The longer you choose to pay the money back over, the lower your payment will be. However, proceed with caution, because this means you will be paying more back to cover the interest payments, which is effectively dead money.
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To pay off several loans over a quicker period, again follow the same process of adding up your current loans, including any extra fees that will be incurred when paying them off. Then decide what period you want to pay your new consolidation loan over. Again, as a general rule, the quicker you choose to pay the money back, the higher the interest rate will be. The advantage of doing this is that you can reduce the total amount you pay back, as there will be less interest to pay.
A 'consolidation loan' can be any type of loan; it is not a particular class of loan itself. It just means to use a loan to pay off other debts, consolidating your payments into one. It could be an unsecured (also called personal) loan, a secured loan, or you could even borrow on your mortgage to pay off the other loans.
The bad credit part refers to a borrowers credit score. This is a rating used by lenders to assess how likely someone is to repay their loan. It measures criteria such as how many loans you already have, how many payments you have missed, whether you have any CCJ's or defaults and other related data.
In summary, make sure you do your research before taking out such a loan. Beware of early repayment fees, as well as a possible 'administration fee' when you pay a loan off. Try and pay the loan over as short a period as you can to keep interest payments down, and shop around for the best rates using a loan broker. A broker can search the market quickly to find their best deal for your financial situation. Combine this with doing your own research going direct to lenders, as some do not use brokers. This will ensure you get the best deal you can.
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