Debt Consolidation Loans for Bad Credit

by on January 12, 2012

More and more consumers are certainly having to exercise better financial management in light of the state of the present economy. However, there are many who have are forced to consider more innovative alternatives if their credit standing has declined to a less than average rating. Having a bad credit rating does not eliminate all the options. There are many ways to bridge the difficulty, and one viable method is through debt consolidation. Common sense dictates that a bad credit score will result in the consumer having to absorb higher interest rates and possibly longer payment terms, but the fact remains that there are lending institutions quite amenable to consider the risk as acceptable and offer suitable debt consolidation loans.

Secured or Unsecured Consolidation Loans – The Options
Most lending institutions have numerous options available for the consumer considering a debt consolidation loan, though these offers will vary in requirements depending upon the current credit standing. One type is the unsecured debt consolidation loan which is much like a standard unsecured loan for bad credit, where there is no collateral offered as a security to the lender to offset the risk of default should the borrower fail to repay the loan. Consequently, this type of loan is much harder to gain approval for, and will usually demand far higher interest rates as a result.

A secured debt consolidation loan is the type that requires or stipulates the use of collateral as security, such as the borrower’s home or other asset such as an automobile in which there is an adequate amount of ownership equity available. The equity is the most common of assets available to the borrower, and invariably decreases the interest rate considerably. Another variation on this particular method is an actual home equity loan, which is drawing on accumulated equity value in the home to gain the necessary funds to pay toward the smaller outstanding credit obligations, which are in most cases, like credit card accounts, having a higher interest rate than the home equity loan would carry. In this manner, the home equity loan acts as the debt consolidation loan for a borrower with bad credit.

Lower Interest and Easier Budgeting – The Benefits
One major benefit of the debt consolidation loan is when the interest rate the lender offers in the process winds up far lower than most, if not all, of the existing debt the borrower is attempting to combine. For instance, if the general interest rate amounts for the credit cards are set at ranges such as 13.9%, to 16.9%, or as high as 19.9% or beyond, and the debt consolidation loan rate is 12%, then the borrower sees a substantial savings, along with the lower monthly payment, as long as the repayment period is not overly long to offset the benefit.

All of the benefits of a debt consolidation loan for bad credit borrowers are definitely worth considering. These loans have far less interest rates than payday loans, short term loans, and credit card loans. In addition, managing a single lower payment is far more convenient than having to budget for the higher costs associated with the many other debts a borrower is trying to handle, and much less stressful. While these debt consolidation loan do extend for greater periods of time, the upside is that while the payments are lower, the borrow has much more flexibility in their cash-flow needs, and, as long as payments are kept up regularly and on time, this improved activity is quickly reflected in their credit scores. It also demonstrates better financial responsibility, which translates into the borrower moving from a high risk status to a medium risk status, and will clearly make all future borrowing needs, such as getting a mortgage loan, that much easier to solve.

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How Does Debt Consolidation Work?

by on July 26, 2011

What is Debt Consolidation?

Each time an individual is extended credit, either from a financial institution or a business, the lender sets an annual percentage rate of interest (APR) that must be paid back along with the principal. When individuals open many lines of credit and begin to accumulate debt, each account will charge the customer their specific interest rate on top of the balance each month. In order to stay in good credit standing, the minimum payments must be made monthly to every account, but when each creditor is charging between 10-20% interest, it becomes difficult for individuals overcome the constant wave of interest that continually accrues.


Debt consolidation occurs when a debt management company takes control of all the accounts an individual owes on and presents the customer with only one bill, allowing interest to be charged to a single account, instead of multiple accounts with multiple APR rates. Debt consolidation experts communicate with the lenders and make deals to settle the remaining balance of the accounts, and then offer the customer a manageable monthly payment with a lower interest rate. When debt consolidators cancel the credit of their customers, they do so at a lower interest rate than the person was initially paying, which allows debt consolidators to pass the saving onto their customers. In many cases, the total amount of debt is reduced and customers save thousands of dollars in interest over time after choosing to consolidate their debt.


Who Could Benefit from Debt Consolidation?
  • Recent College Graduates – College is expensive and many graduates had to turn to private and government loans to pay tuition. Graduation doesn’t always mean big paychecks, so recent college grads can lower their student loan payments and interest by consolidating their debt.
  • People who make Minimum Monthly Payments – The more payments customers make, the more interest they end up paying out. Making the minimum monthly payment on multiple accounts only puts people further into debt. Debt consolidation customers only have to make a single payment every month, instead of four, five, or six.
  • Divorcees and Single Parents – Single incomes and multiple payments just don’t mix. Debt consolidation takes the money that would have been wasted on absorbent interest charges and puts it back into your wallet.
  • Anyone Struggling with Debt – Debt consolidation companies have the leverage and knowhow to reduce the amount you pay each month and keep interest rates affordable, allowing their customers to regain financial control of their lives.
How does Debt Consolidation affect Credit Scores?
Credit scores are directly related to the amount of available credit an individual has. For instance, a person’s credit score is negatively affected when their accounts are maxed out, leaving no available credit. On the other hand, when accounts are paid out and closed, this too can negatively affect one’s credit score. If a debt consolidation company pays off and closes their customer’s accounts, then this could have a negative impact on their score. If the company pays off their customer’s debt, but keeps the lines of credit open, then the affect on their credit score is reduced.

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