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Business Debt Consolidation FAQs – business.com

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Business debt consolidation combines all of your loans into one, which can lower your interest rates and decrease your risk of accidentally missing a payment. However, debt consolidation isn’t for everyone. Before you combine your loans, learn how debt consolidation works and its benefits and risks.

 

Editor’s note: Looking for the right loan for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

 

 

How does business debt consolidation work?

Business debt consolidation is similar to personal debt consolidation. By consolidating all of your business loans into a debt consolidation loan, you can streamline them into one fixed payment and decrease your interest rate, which makes your debt easier to manage.

Consolidation is recommended for business owners who feel overwhelmed with paying multiple creditors various payments every month. Only having to worry about a single payment can help you budget expenses and makes it less likely that you’ll miss a payment that could ding your credit score.

When consolidating loans, consider the amount of debt relief you need, since the loan should be enough to cover your debts. For instance, if you’re approved for a consolidation loan for $10,000 but you have $25,000 in debt, it won’t make sense to consolidate. [Read related article: How to Choose a Business Debt Consolidation Loan]

Does debt consolidation hurt your credit?

Consolidating your debt can lower your monthly loan payments, but it can also cause a temporary dip in your credit score. When you apply for a debt consolidation loan, the lender will make a hard inquiry on your credit, which can lower your credit score by a few points.

However, if you pay your bills on time, you should be able to regain the credit score points quickly. If you need to lower your annual percentage rate (APR) and monthly bills, a temporary dip in your credit score is worth the long-term goal of improving your finances.

Consolidating your debt into one loan may also help you get approved for future loans. When a lender looks at your credit history, they don’t like to see a list of various loans. If you think you might need an additional loan soon to support growth or sustainability, business debt consolidation can help you clean up your credit report.

What is the difference between debt consolidation and a loan?

Since debt consolidation is one of the many ways you can use a business loan, there is virtually no difference between the two.

A debt consolidation loan is simply a business loan that you have designated for paying off other high-interest debts. By using the loan to pay off your existing business debt, including credit card balances, you simplify your finances, replacing multiple payments with one fixed monthly payment.

When should you consolidate business debt?

If you have good credit and a moderate amount of debt, consolidating your business loans can save you money in interest over the long term. It can also streamline your monthly payments so you only have to remember to make one payment each month.

Before consolidating, make an honest report of your finances. Determine what debt payment you can comfortably make every month with your current cash flow. Look at your monthly costs and see where you can afford to make budgetary cuts.

Consolidating business debt is only effective if you change your spending habits. By recognizing your spending triggers and seeking financial advice from your accountant, you can save your business from running into the red.

When is it a good idea to consolidate debt?

It is wise to consolidate debt when you are feeling overwhelmed with tracking multiple payments, but the best reason is a lower interest rate.

If your debts have high APRs, such as business credit cards that average 14.21% to 22.16% APR, but you qualify for a business loan with a low APR – such as from a traditional bank with an average interest rate between 2% and 13% – you may be able to save money on interest. [Read related article: Best Practices to Follow Before Applying for a Small Business Loan]

How many times can you consolidate business debt?

While you can technically consolidate your business debt multiple times, the consolidation process isn’t the hard part. Recognizing that you have an overspending issue is the first step in getting a handle on your debt.

Using any form of debt consolidation to bandage a larger debt so you can continue to spend won’t solve any problems. If you don’t reflect on how you accumulated your debt, you will fall back into the same habits and potentially get into a hole you can’t climb out of financially.

You can get back on track by creating a budget, tracking your spending and mentally preparing for any spending hiccups. Once you pay off your debt in full, consider depositing the cash you were previously paying on your loan into a business savings account. You can then use that account to pay for unexpected expenses upfront, saving you time and avoiding the fees of obtaining another loan. [Read related article: Requirements for Getting a Small Business Loan]

What are the risks of business debt consolidation?

As with any loan, you must carefully consider the costs and risks of debt consolidation. Here are eight to watch out for.

  1. New loan fees: When you apply for a business debt consolidation loan, the lender can tack on fees for the application and approval process. These fees are often added to your original debt, increasing the monthly payment.
  2. Extended loan term: Lowering your monthly payments tends to increase the number of months it will take to pay off the loan in full.
  3. Interest rate qualifications: Finding a loan with a lower interest rate to consolidate your debt under is only possible with good credit and minimal debt. Use a loan calculator to see if a small reduction in your interest rates will make a difference in the total amount you pay over time. If you are already a few years in, or you have bad credit or too much debt, there’s a chance you won’t save any money by consolidating your business loans.
  4. Prepayment penalty: If you’re planning to pay extra money each month on the principal of your loan to pay it off faster, check the fine print of your loan agreement to verify that there’s no prepayment penalty. Lenders add this clause to loan terms to ensure they make the maximum amount of money in interest on your loan.
  5. Consolidation scams: Consumers and business owners get scammed every year by debt consolidation lenders. Stay away from these companies, and instead research DIY solutions such as balance-transfer credit cards with no annual fee and business loans. You can often find these through your financial institution or online vendors. Always go with a company that you have researched and trust.
  6. Collateral: Some banks require collateral such as property, equipment or vehicles to approve a business debt consolidation loan. If you haven’t taken the time to analyze your spending and commit to a strict budget, you could easily fall back into excess spending. Are you prepared to lose what you need to put up for collateral?
  7. Credit score: If your credit score has already taken a hit from your debt, you may not qualify for a debt consolidation loan – or, if you do, the interest might not be any better than what you are paying now. A good credit score is essential to securing business loans. Always aim to make your debt payments in full and on time.
  8. More debt: Consolidating your debt can give you the illusion of having more money – especially if you use it to pay off business credit cards and then have more credit available. Refrain from charging purchases on these cards to avoid the burden of paying back even more debt. [Read related article: Hidden Gotchas in Your Business Loan Repayment Terms]

What fees are associated with debt consolidation?

Debt consolidation can take many forms, including traditional business loans from banks, SBA loans, alternative loans and business credit cards; some business owners even take out personal loans. No matter which you choose, though, fees are commonplace.

Consider all fees and interest rates when deciding whether consolidation will help your business pay off its debts. The types of fees you’re charged, and the amounts of each, vary by lender and the specifics of your loan agreement. Here are some fees to look for before accepting a loan:

  • Application fee
  • Origination fee
  • Guarantee fee
  • Appraisal fee (for collateral)
  • Annual fee
  • Late fee
  • Prepayment penalty
  • Closing costs

Is business debt consolidation right for your business?

When you face debt from multiple creditors, it can feel unbearable. In some instances, business debt consolidation may simplify your payments and reduce your interest rate. Carefully research your options to ensure a business debt consolidation loan is the best solution for your business.

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Will Missing One Car Payment Hurt My Credit Score?

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The short answer is yes: skipping one car payment can hurt your credit score, but not until it hits a certain mark. One missed payment doesn’t destroy your credit score forever, but it can stay on your credit reports for years.

Missed Payments and Your Credit Score

One or two missed payments may not be enough to completely ruin a good credit score, but they can lower your credit score quite a bit. How much your credit score can drop depends on many things, including how much credit history you have and how much time has passed since your missed payment.

How much a missed payment can impact your credit score is heavily influenced by how many missed payments you currently have reported, your current credit score, your credit utilization, how many accounts you have, and more. In other words: your drop in credit score due to one missed car payment is likely to be unique to you. The drop in points could be anywhere from 10 to 100 points, or more.

Will Skipping One Car Payment Hurt My Credit Score?If you have a thin credit file or little to no credit history, one missed car payment can be devastating to your credit score. And, in some cases, having a good credit score and then a reported 30-day missed payment could hurt your credit score more because you have more to lose.

The severity of the missed payment matters too. If you’re 30 days on the payment, it’s not as bad as being 90 days late. Most creditors report missed payments in these timeframes: 30 days; 60 days; 90 days; 120 days; 150 days; and then delinquent/charge-offs after that. The longer you let that missed payment go on being missed, the worse it is for your credit score.

To bounce back from a missed auto loan payment, be sure to make that payment as quickly as you can. The sooner you make up that payment, the better off you are.

How Long Are Missed Car Payments Reported?

Missed and late car payments can remain on your credit reports for up to seven years. How much they damage your credit score lessens each year, but it can still impact your overall credit score years afterward.

Your payment history is the most influential part of your credit score: a whopping 35%. In terms of credit repair, this means making all of your bill payments on time is important. If you have an auto loan that isn’t currently being reported – meaning your loan and on-time payments don’t show up on your credit report – the missed and late payments are likely to be reported anyway. Even auto lenders that don’t generally report their loans to the credit bureaus typically report missed/late payments.

If you think you’re about to miss a payment and you want to avoid hurting your credit, you have some options to explore.

Ask Your Lender for a Deferment

Lending institutions understand that times can get tough. If you think you’re about to miss a payment, contact your lender right away and ask what options are available to you. Keep your lender in the loop if you’re going through rough times – the sooner you get ahold of them the better.

This is especially true right now, given the current pandemic. Many borrowers left without work have been forced to find alternatives to making payments and needed assistance with their car loans and mortgages. There is a process that allows borrowers to take a breather and gather themselves, and it’s called a deferment.

A deferment, in a nutshell, pushes the pause button on your auto loan. Most times, lenders pause the car payments for up to three months and add those payments to the back of the loan term. If you qualify, you may be able to recenter yourself and get back on track. After the deferment is up, the car payments resume and you continue paying as normal.

The only downsides to this option are that your interest charges continue to accrue, and your loan term is extended. However, in the grand scheme of things, a few more months of a car payment and interest charges is better than default or multiple missed payments!

There is a common stumbling block to deferments though: most lenders don’t approve these plans unless your current on the loan. If you’ve already missed one payment or more, then the lender isn’t likely to approve it.

Is Refinancing Your Auto Loan an Option?

If you’re struggling to keep up with your current car loan, refinancing for a lower monthly payment could be the answer.

Refinancing involves replacing your current loan with another one, typically with a different lender. Most borrowers refinance to lower their monthly payments by either lowering their interest rate or extending their loan term (sometimes both).

To refinance, you also need to be current on your auto loan. Most lenders that offer refinancing don’t consider borrowers with multiple missed/late payments on their car loan. Additionally, you generally need to meet these requirements for refinancing:

  • Must have equity in the car or the loan balance must be equal to the vehicle’s value
  • The car is under 10 years old with fewer than 100,000 miles
  • Your credit score has improved since the start of the loan

You may need to meet other requirements, depending on the lender you choose. Refinancing doesn’t typically require a “perfect” credit score, but you may need a good one to qualify.

Ready to Get a More Affordable Car?

If you’re struggling to make ends meet and worried about skipping payments, then it may be time to sell your car and get something more affordable. If you’re concerned that a poor credit score could get in the way of your next auto loan, then consider a subprime lender through a special finance dealership.

Subprime lenders are indirect lenders that are signed up with certain dealers. They assist borrowers in all sorts of unique credit circumstances, and they could help you get into a more affordable vehicle if you qualify.

Finding a subprime lender can be as simple as completing our free auto loan request form. Here at Auto Credit Express, we work to match borrowers to dealerships with bad credit lending resources in their local area, at no cost and with no obligation. Get started today!

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How to Avoid a Prepayment Penalty When Paying Off a Loan | Pennyhoarder

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Look at you, so responsible. You received a financial windfall — stimulus check, tax refund, work bonus, inheritance, whatever — and you’re using it to pay off one of your debts years ahead of schedule.

Good for you! Except… make sure you don’t get charged a prepayment penalty.

Now wait just a minute, you say. I’m paying the money back early — early! — and my lender thanks me by charging me a fee?

Well, in some cases, yes.

A prepayment penalty is a fee lenders use to recoup the money they’ll lose when you’re no longer paying interest on the loan. That interest is how they make their money.

But you can avoid the trap — or at least a big payout if you’ve already signed the loan contract. We’ll explain.

What Is a Loan Prepayment Penalty?

A prepayment penalty is a fee lenders charge if you pay off all or part of your loan early.

Typically, a prepayment penalty only applies if you pay off the entire balance – for example, because you sold your car or are refinancing your mortgage – within a specific timeframe (usually within three years of when you accepted the loan).

In some cases, a prepayment penalty could apply if you pay off a large amount of your loan all at once.

Prepayment penalties do not normally apply if you pay extra principal in small chunks at a time, but it’s always a good idea to double check with the lender and your loan agreement.

What Loans Have Prepayment Penalties?

Most loans do not include a prepayment penalty. They are typically applied to larger loans, like mortgages and sometimes auto loans — although personal loans can also include this sneaky fee.

Credit unions and banks are your best options for avoiding loans that include prepayment penalties, according to Charles Gallagher, a consumer law attorney in St. Petersburg, Florida.

Unfortunately, if you have bad credit and can’t get a loan from traditional lenders, private loan alternatives are the most likely to include the prepayment penalty.

Pro Tip

If your loan includes a prepayment penalty, the contract should state the time period when it may be imposed, the maximum penalty and the lender’s contact information.

”The more opportunistic and less fair lenders would be the ones who would probably be assessing [prepayment penalties] as part of their loan terms,” he said, “I wouldn’t say loan sharking… but you have to search down the list for a less preferable lender.”

Prepayment Penalties for Mortgages

Although you’ll find prepayment penalties in auto and personal loans, a more common place to find them is in home loans. Why? Because a lender who agrees to a 30-year mortgage term is banking on earning years worth of interest to make money off the amount it’s loaning you.

That prepayment penalty can apply if you want to pay off your loan early, sell your house or even refinance, depending on the terms of your mortgage.

However, if there is a prepayment penalty in the contract for a more recent mortgage, there are rules about how long it can be in effect and how much you can owe.

The Consumer Financial Protection Bureau ruled that for mortgages made after Jan. 10, 2014, the maximum prepayment penalty a lender can charge is 2% of the loan balance. And prepayment penalties are only allowed in mortgages if all of the following are true:

  1. The loan has a fixed interest rate.
  2. The loan is considered a “qualified mortgage” (meaning it can’t have features like negative amortization or interest-only payments).
  3. The loan’s annual percentage rate can’t be higher than the Average Prime Offer Rate (also known as a higher-priced mortgage).

So suppose you bought a house last year and then wanted to sell your home. If your mortgage meets all of the above criteria and has a prepayment penalty clause in the mortgage contract, you could end up paying a penalty of 2% on the remaining balance — for a loan you still owe $200,000 on, that comes out to an extra $4,000.

Prepayment penalties apply for only the first few years of a mortgage — the CFPB’s rule allows for a maximum of three years. But again, check your mortgage agreement for your exact terms.

The prepayment penalty won’t apply to FHA, VA or USDA loans but can apply to conventional mortgages — although the penalty is much less common than it was before the CFPB’s ruling.

“It’s more of private loans — loans for people who’ve maybe had some struggles and can’t qualify for a Fannie or Freddie loan,” Gallagher said. “That block of lending is the one going to be most hit by this.”

How to Find Out If a Loan Will Have a Prepayment Penalty

The best way to avoid a prepayment penalty is to read your contract — or better yet, have a professional (like an attorney or CPA) who understands the terminology, review it.

“You should read the entirety of the loan, as painful as that sounds, because lenders may try to hide it,” Gallagher said. “Generally, it would be under repayment terms or the language that deals with the payoff of the loan or selling your house.”

Gallagher rattled off a list of alternative terms a lender could use in the contract, including:

  • Sale before a certain timeframe.
  • Refinance before a term.
  • Prepayment prior to maturity.

“They avoid using the word ‘penalty,’ obviously, because that would give a reader of the note, mortgage or the loan some alarm,” he said.

If you’re negotiating the terms — as say, with an auto loan — don’t let a salesperson try to pressure you into signing a contract without agreeing to a simple interest contract with no prepayment penalty. Better yet, start by applying for a pre-approved auto loan so you can get a pro to review any contracts before you sign.

Pro Tip

Do you have less-than-sterling credit? Watch out for pre-computed loans, in which interest is front-loaded, ensuring the lender collects more in interest no matter how quickly you pay off the loan.

If your lender presents you with a contract that includes a prepayment penalty, request a loan that does not include a prepayment penalty. The new contract may have other terms that make that loan less advantageous (like a higher interest rate), but you’ll at least be able to compare your options.

How Can You Find Out if Your Current Loan Has a Prepayment Penalty?

If a loan has a prepayment penalty, the servicer must include information about the penalty on either your monthly statement or in your loan coupon book (the slips of paper you send with your payment every month).

You can also ask your lender about the terms regarding your penalty by calling the number on your monthly billing statement or read the documents you signed when you closed the loan — look for the same terms mentioned above.

What to Do if You’re Stuck in a Loan With Prepayment Penalty

If you do discover that your loan includes a prepayment penalty, you still have some options.

First, check your contract.

If you’ll incur a fee for paying off your loan early within the first few years, consider holding onto the money until the penalty period expires.

Pro Tip

If you don’t have a loan with a prepayment penalty, contact your lender before sending additional money to ensure your payment is going toward principal — not interest or fees.

Additionally, although you may get socked with a penalty for paying off the loan balance early, it’s likely you can still make extra payments toward the balance. Review your contract or ask your lender what amount will trigger the penalty, Gallagher said.

If you’re paying off multiple types of debt, consider paying off the accounts that do not trigger prepayment penalties — credit cards and federal student loans don’t charge prepayment penalties.

Tiffany Wendeln Connors is a staff writer/editor at The Penny Hoarder. Read her bio and other work here, then catch her on Twitter @TiffanyWendeln.

This was originally published on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through actionable and inspirational advice, and resources about how to make, save and manage money.

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10 things you didn’t know will help you get a mortgage

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Anyone who wants to apply for a mortgage right now will know that it’s not easy. Coronavirus has made the process of applying longer, while lenders are now more careful than ever about who they will lend to. You probably already know that having a healthy credit score is essential to a successful mortgage application, but how can it be achieved? Personal finance experts from Ocean Finance  weigh in with the top tips for making sure your application is a success – that you may not have heard about. 

1. Make sure your name is on all household bills

If you share a rental, it can be tempting to let someone else put their name down on the utility bills and just pay them back. If you want a mortgage, avoid doing this: bills with your name and address on them are proof that you pay them on time. This especially applies to the rent itself – never move into a house share without your name being on the contract. Before applying for a mortgage, ask your landlord for a letter confirming that you pay on time. 

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