There was a time when having a low credit rating and facing heavy debts was enough to lead to bankruptcy. But these days there are ways to recover the situation, rebuild your credit reputation and ease the financial burden in one go. The availability of personal loans for bad credit borrowers means anything is possible.
It might seem that taking on another debt in order to recover from a difficult financial situation is a step backwards, but there is method in such madness. When it comes to clearing existing debts, the benefits can be immediate and so there is a genuine chance to take control of financial matters completely.
But exactly how can a new personal loan work to your benefit? Well, there are several ways, but the most obvious are listed below.1. Clear Outstanding Debts
Lifting the weight of debt is the most beneficial purpose of any loan. Lenders like to know their funds are going to be used for the right reasons, so using a personal loan for bad credit management, to repay debts where possible, does help in securing approval.
There is some care needed to get it right, however. For any real benefit to be enjoyed from clearing existing debts in this way, the monthly repayments on the loan need to be significantly less than the previous repayments.
There are ways to assure this, even if the personal loan is large ($25,000 or more). The interest rate is likely to be higher than usual, but by agreeing a longer term for the loan, the size of the repayments can be kept very low. Repayments on $25,000 over 10 years will be much less than they would over 5 years.
Lessening, or even fully removing, debt has a long-term benefit in that the loan options available in the future are greatly improved too. Generally, personal loans for bad credit borrowers are designed to help them improve their financial situation, and this is done in two ways: by increasing the credit score, and by improving the debt-to-income ratio.
The credit score is increased every time a debt is paid in full, so by clearing existing debts in one go, a credit score can jump up by as many as 70 points – depending on circumstances. As a consequence, the interest rates charged on any future loan are reduced, while the loan limited is raised.
The debt-to-income ratio is greatly improved because the portion of income committed to repaying debts is lowered dramatically. This leaves a large amount of excess income, which in turn makes the chances of securing approval on a large personal loan even greater.3. Restore Credit Reputation
All of this is related to the core point of the exercise, and that is to restore your credit reputation. It is important to note that loan approval is never dependent on credit scores, though it is heavily influenced by the debt-to-income ratio. By using a personal loan for bad credit management both are improved.
The result is not just that applicants can qualify for a loan more readily, but that lenders are more willing to look favorably on the applicant. If a credit reputation is restored, then lenders will conceded to improved terms because they feel confident they will get their investment back.
Of course, clearing existing debts is the priority when financial pressures are high. But it is good to know that future personal loan terms can also be made excellent.