Bad Debt? Consolidation Might be the Answer

Defaulting on your loans can lead to very bad credit and with a bunch of different payments each month, getting back on your feet may seem daunting and confusing. Consolidating your debt into one loan may make it easier for you to make your payments and avoid dealing with several different creditors. Depending on your bad debt, consolidation may not be the best choice for you, however. Take a look at the different types of debt consolidation and how each type will affect your finances.

Bad Debt Consolidation Secured Loan

One of the many reasons people consolidate their debt is to reduce their high interest rates on their loans. If you have bad credit, it may be difficult to consolidate your debt and get a better interest rate without taking out a secured loan. A secured loan means, as the name implies, that your new loan is secured against some sort of capital, usually your house. In most cases, you can reduce your monthly payment for the sum total of your separate monthly payments through a secured loan. With some home equity loans, you can even get cash out if you get your new loan for a larger amount than your current debt.

Secured loans can be very risky, though, if you are already having trouble making your current payments. It is very important that you make a realistic budget before you apply for a home equity loan to make sure that you will be able to make your payments in full and on time. The consequences when you default on your current loans are strikes against your credit but the

consequence of defaulting on a loan secured against your house is that you lose your home.

Bad Debt Consolidation Unsecured Loan

You could try to consolidate your debt with an unsecured loan if you do not own property or are not quite ready to lose your home. Most lenders are far less eager to offer unsecured loans with low interest rates and low monthly payments. If you are determined to consolidate, the best option to lower your monthly payment is to take out the loan for a longer term. The downside of a longer term is that you will be paying off this debt for a good chunk of time and will have to deal with prepayment penalties if you are able to pay off your debt early.

Credit Counseling

Your only option might be credit counseling if your bad debt is truly so bad that you are already in collections. These programs can help you reduce your monthly payment and put you on a “debt management plan.”

Make sure that your credit counselor has your best interests at heart before you sign up for a program. Promises that are too good to be true usually are and a good credit counselor will work with you to establish a budget and get your finances in order in addition to rearranging your debt.

Bad debt can seem like a huge burden, but if you actively take steps to restore your credit rating, over time your efforts will pay off. Debt consolidation may be an excellent choice to get you on the right path, but like any large decision regarding your finances, take your time making a choice and find out as much as you can about lenders, the deals they are offering, and your other options. By considering all the factors involved in consolidation, you will be protecting yourself and your home in the end.

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