Bad Credit Debt Consolidation

Difficult financial situations often require new plans of actions, and with various useful alternatives for debt consolidation, there are many ways for individuals to find debt relief. Such choices become a bit more confusing (and pressing), however, for individuals plagued with bad credit.

What is “bad credit”?

“Bad credit” describes the status of an individual whose credit history lacks evidence that the person is a responsible and reliable user of credit. Many financial actions can contribute to this situation, including late payments, past-due accounts, using too much available credit, and applying for large amounts of credit.

Such actions indicate to potential creditors that to lend to you would be risky. Naturally, they want to protect themselves, so it is more difficult for individuals with bad credit to obtain new credit and/or decent interest rates than it is for others.

Despite some roadblocks, people with bad credit who are in need of debt consolidation have three basic options to consider: a secured debt consolidation loan, an unsecured debt consolidation loan, or enrollment with a debt consolidation company. While there are pros and cons for each route, all can work well for the debtor with less-than-perfect credit.

Debt Consolidation Loans

Many consumers prefer to combine various individual debts into a single debt so that the bill-paying process is simplified. Rather than having to juggle multiple payments to different creditors each month, consumers who obtain debt consolidation loans only need to make one. Additionally, it sometimes is possible to secure a lower interest rate with a debt consolidation loan.

Obtaining a debt consolidation loan also can help to begin mending one’s credit. Closing a number of accounts by consolidating will help your score, just as it will improve by making reliable payments on the loan.

Such loans may be either secured or unsecured. A secured loan requires that the borrower secure the debt against a piece of valuable property that may be taken should he or she fail to repay the lender. An unsecured loan, on the other hand, requires no such action.

Secured Debt Consolidation Loans

It usually is much easier for individuals with bad credit to obtain secured loans rather than unsecured, because the former offers a great deal more protection for the lender. In fact, this is one of the best debt consolidation options for many people with bad credit.

A house usually is the property that is secured against such loans, so homeowners will have the most luck with this alternative. Two types of home loans, home equity loans and home equity lines of credit, are used commonly as debt consolidation loans.

Home Equity Loans (HELs): Home equity loans allow homeowners to take out the equity that they have built up in their homes and to use the money for any purpose -- so paying off other debts and consolidating them into your HEL is ideal. The money is provided in one lump sum, which you then repay in installments.

Home equity loans also tend to have low interest rates. Before deciding that an HEL is for you, however, there are a couple of things to consider.

For example, how long do you plan to stay in your home? If you decide to move, then the entire amount of your loan will become due. Consider also that, once you take out most of the equity in your house, it no longer will available to you should the need arise before your loan is repaid.

Home Equity Lines of Credit (HELOCs): Home equity lines are very similar to home equity loans, except that they provide credit as it is needed instead of in one lump sum. HELOCs act like credit cards: you have a credit limit that you can draw from whenever the need arises.

Obtaining a HELOC is a good option because it is useful to retain some equity in your home for potential future use. While it is convenient to take out only as much money as you need, however, only individuals who know that they will not use the available line irresponsibly in the future should consider a HELOC.

Unsecured Debt Consolidation Loans

Unsecured debt consolidation loans are much more difficult to obtain than secured loans, especially for those with bad credit. Legitimate unsecured loans will be granted to those with bad credit only for small debts and with a very high interest rate attached. If your debt is large, however, then any unsecured loan offers you receive almost certainly are not from a reputable source.

If you are considering an unsecured loan, then consider carefully your ability to pay. A very high interest rate could hurt your financial situation significantly. Despite your best intentions to pay diligently, unexpected expenses may arise or you could accidentally make a late payment or two.

To be certain that a particular interest rate is reasonable, you should compare rates from several different lenders before deciding to take out an unsecured debt consolidation loan.

Debt Consolidation Companies

Attaining a debt consolidation loan may not work for some people, particularly for those who do not own a home and have too much debt to obtain an unsecured loan. If your debt load is unmanageable to the point that you are unable to pay, then you might consider debt settlement.

Debt settlement, which goes by many other names like debt repayment plan or debt management plan, begins with enrollment in a debt consolidation company. You will cease monthly payments to your creditors and instead will save your money in a settlement account. Your counselor will negotiate with your creditors to “settle” your balance for an amount that you can afford.

Your creditors are paid off one-by-one as the money in your account allows. At the end of the program, your accounts should be considered paid-in-full and reported to the credit reporting agencies as such. Thus, your credit ultimately will go from bad to much, much better.

However, because you necessarily must let your accounts fall behind while your counselor is in negotiations, your credit actually will get worse at first. If your credit already was bad, then this reality could lead someone to take legal action against you for payment, which they very well could do.

Working with a debt consolidation company usually is a better option than filing bankruptcy, but it is imperative that you fully consider your options before enrolling. The debt consolidation industry unfortunately is wrought with scams, so make sure to check companies with the Better Business Bureau and to ask for recommendations before you enroll.

How Can I Improve My Credit?

There is no question that it is better to have adequate credit instead of bad credit, so you want to improve your situation as soon as possible. While some debt relief alternatives like consolidation loans fundamentally improve your credit, you also should take steps toward credit repair.