At one point in time, we all depend on the money provided by loans. Whether it's to finance our college education, pay for a new car, or buy a house, loans can make big purchases possible. However, not everyone is in the best financial situation and may struggle to pay off what they owe. If you don't meet your quota every month, then it's possible for the loan to default.
A defaulted loan is one of the worst things that can happen. Whenever a loan defaults, it's sent to a collection’s agency. Collection agencies are companies that lenders use to acquire the funds they are owed. When this occurs, this can cause your credit score to lower significantly. So, the question stands: what can you do after defaulting on your loans? In this post, we'll be covering everything people need to do after they've defaulted on their loans.
You can nip your debt problem in the bud through a few methods. The most notable one involves debt consolidation. Debt consolidation is a process where you take out a new loan to pay off what you owe. It essentially combines all your debt into a single payment. This can help relieve stress from managing multiple forms of debt. Furthermore, it's also a fantastic way to give your credit score a much-needed boost. What's more is that consolidating can also reduce the interest rate attached to your new loan, which makes it easier to budget for. If anything can cause paying off debt to be more difficult, it's the unpredictable nature of interest rates. Interest rates are basically a lender's own form of security. They're to ensure a borrower always pays their dues on time.
Despite helping you find balance in your financial life; consolidating isn't without its faults. In some cases, debt consolidation may not be the best choice. For starters, many go into this thinking that consolidating their debt will solve most, if not all, of their financial troubles. Consolidating is handy when you have too much debt, but it's not a guaranteed way to get out of it. It's designed to make it easier to get a better grasp on the situation. The next con you need to be aware of is that you may have to pay a few fees before you can consolidate. The fees you might have to pay can include annual fees, loan origination, balance transfer and potential closing costs.
Lastly, you might have to pay a higher interest rate. There are several reasons as to why this can happen, like your credit score. If your credit score is low, the interest rate can be higher than usual. In fact, this brings us to another con: if you have a low credit score, it might be in your best interest to avoid it. The ideal credit score for consolidation is over 700, but it's possible to get it if your score is 670 at the very least. Any lower than that, and you may even be declined from the process entirely. Fortunately, there are plenty of ways you can boost your score.
Snowballing your debt is a fantastic method. Snowballing is when you pay off the smaller amounts first and work your way up to the more prominent debts. Another potential factor is that you have a short credit history. Building up your history is absolutely vital to your financial longevity. There are a small handful of purchases you can make without a credit history, like buying a car or financing a mortgage. Whatever the case may be, it's important that you start investing into your credit history as soon as you can.
Loan rehabilitation is something that's used exclusively for student loan debt. Because of the sheer cost of college, many have a hard time paying off their student loan debt. Defaulting on your student loans can be incredibly damaging to your financial health. Rehabilitating your loans is when you make consecutive payments through a certain period. This is to help you re-establish trust with the lender, so you don't have to automatically pay off tens of thousands at once.
If you want to show your lenders that you can be trusted with your loans, then your best course of action is to pay more than the required amount. It can prove that you're dedicated to your financial obligations. You can pay more by making double payments or even financing most of the debt at once.
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