Debt Agreements vs Consolidation loans

Debt agreements are a solution for people who are insolvent and are unable to meet their debt repayments to their creditors. A debt agreement is a negotiated agreement between you and your creditors, which will typically stand over a period of anywhere between one and five years. At the end of the agreed term, provided you stick to the terms of the agreement and maintain the agreed repayments, you could find yourself debt-free.

The debt agreement allows you to make a single interest free repayment on either a weekly, fortnightly or monthly basis to suit your situation.

Debt Consolidation Loan

A debt consolidation loan is a loan taken to cover several smaller outstanding debts, thus pulling all your debt into one place involving only one payment. Debt consolidation loans are an option for people who can afford their current repayments but would like to refinance in order to pay less. The main benefits of which are lower interest rates and lower repayments making the debt more financially viable.

If you are looking to consolidate a credit card then the interest is likely to be significantly higher than APR or interest on a personal loan. Depending on the various credit cards and loan offers available to you, there may be an overall saving as well as easier management of debt through only having a single repayment to make each month.

If a debt consolidation loan is a viable option for you, and an affordable one then you should not be making a debt agreement application. It is not always financially beneficial to consolidate debts, therefore before making a decision to apply for a debt consolidation loan you should make sure you’ve looked at all your options and assessed the available interest rates and savings. You may find that with your current debts, the interest rates available to you are quite high. If your standing individual debts have a good rate of interest then you may be better off leaving them as they are. If you have credit cards with high interest on the balance, you may want to look into credit card offers. Many cards will offer 0% on balance transfers.

What You Should Keep In Mind

Keep in mind before deciding to apply for a debt consolidation loan, that you need to be aware of the fact that these are generally an unsecured personal loan offered by banks and other mainstream financial institutions. Therefore loan qualifying criteria is fairly stringent and credit checks must be passed.

These stringent credit checks and tight criteria mean that it will be next to impossible to find a debt consolidation loan for someone who has some history of bad credit including any unauthorised over drafts, defaulted on any payments such as loans or credit cards or unpaid bills. It will also be difficult to pass the credit checks if you are unable to support your loan application with financials, you need an awful lot of documentation to get an unsecured loan, simply because it is unsecured and the creditors need much more guarantee’s that they will actually see their money back. A secured loan offers them that security, but because the credit checks are less stringent and the borrower is likely to be more desperate the interest is very high.

If you have more than $50,000 of unsecured debts for consolidation then it highly likely that you will be declined a consolidation loan by creditors, simply because it’s a big risk to the creditor to lend such a large sum of money.

You will also be rejected in your application of the loan if you are currently regularly late with loan repayments or you have credit cards that are over their authorised limit. If you have regularly failed to make the minimum payment on your credit card this will also be detrimental to you.

You are likely to be declined a consolidation loan if you have only been in your current job for less than twelve months or if you have only recently become self-employed. Creditors like to see three years of accounts as proof of income when lending to a self-employed borrower. If you have only recently become self-employed then you will be unable to provide this, meaning you will be turned down.

Influence Of Financial Hardship

If you have recently applied for financial hardship to your lender then you will not be accepted for a consolidation loan. Lenders loan money on the basis that the borrower will pay them back. A credit check is run to safe guard their investment, and it is an investment as you pay them interest, and ensure they don’t lose money. If you have already applied for financial hardship, that shows them you are struggling to meet your current debt and will very likely fail to pay theirs. You will be declined.

Following on from the last point, if you have made more than three personal loan applications within the past three months you will automatically fail the credit check. If you have made three loan applications, that tells creditors that you were declined those last three loans and therefore, must have a bad credit history or something financially detrimental to have been turned down three times. If you want a loan, avoid applying for loans close together, it is very damaging to your credit score.

Remember that the first step to getting your debt under control is changing your attitude towards spending. If you continue to spend beyond your level of affordability, you will continue to have debt problems, with or without debt consolidation or any other form of debt solution.