A Guide to Bad Debt Consolidation Loans

Is Consolidating Debt with a Secured Homeowner Loan the Answer?

Consolidating debt could help with money management and reduce debt repayments each month. Find out whether a bad debt consolidation loan is the viable option.

Previous credit problems lead to financial difficulties, poor credit and unpaid debts. A bad debt consolidation loan is a way of paying off existing loans, credit cards, medical debts and other unpaid bills and making a single, monthly repayment. This means that there won't be any further unwanted collection agency contact as unpaid debts will have been settled. However, a poor credit debt consolidation loan will only be offered to customers who can provide the lender with security.

Unsecured vs. Secured Bad Debt Consolidation Loans

A loan for debt consolidation is very unlikely to be offered on an unsecured basis due to a suspect credit history. The risk of the borrower defaulting is far too high, especially in the current financial climate. However, consolidating debt may be possible, provided that there is sufficient home equity available. Equity is the difference between the value of a house and any mortgages and loans secured on it. It takes longer to arrange a secured loan because the value and structure of the property will need to be fully assessed.

Interest Rate on Poor Credit Debt Consolidation Loans

Although some loans for debt consolidation will be considerably more expensive, they typically have an interest rate of 15-25%. A good credit secured homeowner loan will only cost about 7-10%. There will also be arrangement, broker and surveyor fees to take into account. Although it is possible to spread the repayments over an extended term, this will increase the amount of cumulative interest that is repaid over the life of the loan. It is important to consider how much interest will be repaid and not just the revised monthly payment. Simply looking at the monthly debt repayment can prove very misleading.

Defaulting on a Secured Bad Debt Consolidation Loan

It is important to appreciate the consequences of defaulting on a poor credit debt consolidation loan. Whilst unsecured debt doesn't give the lender any great powers to recover their money, this isn't the case with a secured homeowner loan. A change of circumstances, such as unemployment, could result in an inability to keep-up with the monthly repayments. Once the borrower is more than three months in arrears, the lender may be able to get permission from the court to repossess their collateral. Whilst they are legally obliged to get fair market value, the customer can be pursued for a deficiency for up to 12 years.

Alternatives to Consolidating Debt

Whilst a bad credit secured loan can improve affordability and stop unwanted collection agency contact, it does so at a risk. Consumers who have largely unsecured debt may wish to consider a debt relief program, such as a debt management plan or debt settlement program. This will help to reduce debt repayments and/or reduce the principal. It may be better than putting up the family home as collateral.

Home