The very idea of using loans to clear debt might sound absurd to most of you. After all, one of the reasons you’re currently in debt is likely due to a loan of sorts. Lots of people end up in debt due to things like student loans, mortgages, and so on. While these types of loans are typically ‘good loans, they can put stress on your finances when mounting up. Then, factor in the ‘bad’ loans you might have taken out at some point – like a payday loan. It all ends with you borrowing lots of money and needing to pay it back.
Therefore, surely the worst thing you could do is borrow more money? How is that going to help you clear debt, won’t it make the problem worse? Ironically…it can do both! If you use loans incorrectly, they will just pile more debt on your shoulders and make it even harder to clear. Before you know it, you’re filing for bankruptcy and all your assets are being seized. But, when used correctly, they can lighten your burden and make it far easier for you to repay your debts. As a result, you need to focus on using loans correctly to see their true benefits. That’s exactly what you’ll learn if you keep on reading…
Use a loan to consolidate your debts
Debt consolidation loans are used to bring all of your various debts together. Let’s say you have a personal loan, a mortgage, and a couple of payday loans. Paying all four of these loans individually is beyond frustrating. Each one has different terms, rates, and fees. People usually get into the trap of focusing on the most expensive loan first. You do everything you can to pay it off, and you may eventually do so. However, in doing this, you’ve ignored the other three loans and they incurred interest charges and mispayment fees, etc. The irony is, you probably owe more money now, even after repaying one of your loans.
With debt consolidation, you can take out a loan that covers all of your debts. Imagine you owe $10,000 across all four loans, you’d borrow this amount from a lender and use it to pay the four other lenders. Now, all of your original loans are cleared, giving you room to breathe. Yes, the eagle-eyed readers will notice that you actually still have debt. What happens to the loan you just took out to consolidate those other debts? Of course, you have to pay it back.
Okay, how are you in a different position from before? Technically, you still owe $10,000! Well, the difference is that there’s only one lender to worry about. Not only that, but the loan should be on more reasonable terms than the other four combined. Funnily enough, that’s one way to determine if a debt consolidation loan is worth it or not. As you compare providers, make sure you check the interest rates and fees. You should be able to work out how much you have to pay every month to clear the debt. Ideally, it will work out cheaper overall than paying all four of your previous debts individually. So, while you are still in debt, you’re in a much better position to make regular payments and slowly climb out of this deep, dark hole.
There’s another way to use a new loan to improve your current debt situation. While consolidation loans replace multiple loans with one loan, refinancing only replaces one. It works best when you have one loan that’s really making life hard for you. For many people, it’s used to make your mortgage more affordable as you go through life. Obviously, the more loans you have, the less sense refinancing makes. If you have to refinance four loans, won’t it be better to just consolidate them instead?
Nevertheless, loan/debt refinancing is where a new loan is taken out to change the terms of the current loan. It works in a similar way to consolidation in that the money you borrow from the new loan basically pays off the old one. Again, the idea of doing this is so you get better loan terms. Some loans – particularly mortgages – have fixed interest rates for a set number of weeks/months/years. After which, the rate goes up, and you start paying more. This increase can damage you and make it harder for you to keep up with payments, usually slipping behind and dealing with excess fees. So, by getting a new loan, you can take advantage of a fixed rate once more. Now, it’s easy to make your payments again, and your debt doesn’t keep mounting up.
As with a debt consolidation loan, you need to check that your new loan offers better terms and rates than the current one. Otherwise, there’s no point in taking it out! If you still don’t understand the concept of refinancing, the video below does a really good job of explaining things in simple terms:
Getting loans with bad credit
By now, you’re opening up to the idea of using a loan to help you get out of debt. Whether you use it to consolidate numerous debts or refinancing one, loans can be very useful. However, there’s a problem that many of you have probably identified – how do you get a loan with bad credit? After all, if you’re heavily in debt, your credit rating will take a beating. Don’t worry, there are a few things you can look into.
Hard money loans
Hard money loans are a particular type of loan that can be used by people without a good credit score. For the most part, it is essential to understand how they work as they can provide the money you need to get out of your situation. Without going too deep into things, hard money loans are secured loans. Specifically, they’re secured against a property that you own. Let’s say you have a house, the lender will secure the loan against it, basically meaning they have some sort of control over it if you don’t keep up with the loan terms. It sounds scary, but you have nothing to worry about if you repay the loan. It’s just a safety measure for the lender, meaning they can take your asset and sell it if you don’t pay them. These loans are regularly designed for people with bad credit as the asset is used as security.
Bad credit loans
Similarly, some lenders specifically cater to people with bad credit. You’ll find a lot of loans for debt consolidation are like this. Why? Because this financial product is basically aimed at people with bad credit. You wouldn’t need a debt consolidation loan if you had an incredible credit score and very little debt to worry about! Lenders realize this, so you can find plenty of loans on the market where a credit check isn’t the be-all and end-all. Still, if you can demonstrate that you’ve tried to improve your credit score – by paying bills on time, registering to vote, and so on – it will help your applications.
To conclude, loans can be used to clear your debts if you use them for consolidation or refinancing. Debt consolidation loans work best when you have multiple loans weighing you down. Debt refinancing is ideal when you have one or two loans that are causing stress, and you want to get a lower interest rate, making it easier to repay them.