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Can 12 Month Loans Help You Pay off Debt?

London Cash Lender

Debt is a universal problem, not limited to bad credit borrowers. When you take out a short-term loan, it seems to be affordable because you have to pay it off in a lump sum, but when the due date approaches, it turns out to be a nightmare.

It is quite apparent to have even a small payment seemed as a balloon payment when you do not have the potential to payback. It adds up the cost because it invites late payment fees and interest penalties. This situation may arise despite borrowing money at a lower interest rate due to a good credit rating.

Once you have fallen behind payments, it becomes more urgent to get back on the track. Otherwise, you will end up with a debt trap. If you have been juggling with multiple debts, you have to find a solution to get out of it early.

There are various options to get out of this quicksand from debt consolidation to debt management programmes. They can be expensive because the third party will charge fees. When you find yourself in hock, the first attempt you may try is to rob Peter to pay Paul to stay afloat, but the balloon goes up when you do so.

So, what is the solution? Take out 12 month loans with bad credit. These are instalment loans that require no guarantor. As the name suggests, the length of these loans is up to one year. You will pay down the loan in 12 equal monthly instalments.

Since you have to pay down over an extended period, you will be managed to pay it back. Here the question is whether these loans can help you get out of unwanted debt pressure. Continue reading it to get the answer.

 

The borrowing amount matters

 

As the length of these loans is 12 months, you will have to borrow a large amount of money. Just because you are struggling with debt payments, it does not mean you will take out instalments to pay them off.

The borrowing amount needs to be big enough to divide payments over 12 months. You will likely need to borrow more than you need. For instance, the total of your credit card bills, outstanding dues of debts and utility expenses are £1500. You do not have money to pay it back in a lump sum, and hence you are planning to take out a one-year instalment loan - at least, you will escape late payment fees and interest penalties.

It may be a smart idea, but no lender will approve your application for this small amount.

 

Look out for the payment method

 

First off, you need to understand that not all direct lenders allow you to apply for amortised instalment loans. Amortisation means your every instalment will go toward both the principal and the interest. Not all lenders provide this facility.

 

Fixed monthly instalments mean you will pay down interest over a year and then the principal amount at the end of the term. You can settle all your current dues at one fell swoop, but do not forget that you will have to repay the 12-month loan. If you do not manage to pay back this loan, you will fall again in a debt trap.

Apart from interest-only payments, you may be asked to choose between the following payment methods:

  • Equal principal payment
  • Equal total payment

Both these options require you to pay the principal and interest together, but a few lenders offer these payment options. Make sure that you choose a payment method that suits your budget.

 

Consider your affordability

 

Instalment loans seem much more affordable than other short-term loans, but you cannot throw caution to the wind at the time of putting in the application. The rule of thumb says that you should consider your financial capacity to determine whether you can afford it along with regular expenses.

  • Make a list of all your expenses. Deduct them from monthly income to calculate net worth.
  • Use online calculators to find out the total cost of the loan.
  • Compare it with an annual net worth that must be higher.

If your net worth is lower than what you have to pay, it will be a silly idea to apply for these loans.

 

Have an emergency cushion for unforeseen expenses

 

No matter how much money you are borrowing and how affordable it seems, make sure that you have stashed away some money to meet unexpected costs. One year is a bit long. An unexpected expenditure can pop up at any time.

You must have some money set aside to dip into because borrowing more money along with this loan is not easy. If anyhow you get your application signed off on, you will face difficulty managing both loans.

12-month loans can quickly help you pay off current dues, but make sure that you have the potential to pay it back. Consider interest rates and affordability before putting in.