Bad Credit Debt Consolidation
Let’s discuss first what debt consolidation is and how it may help you. Put simply debt consolidation is a new loan that will pay off all of your other loans. It used to be that this was a great option because you could probably get a new creditor to pay off all of your other loans and just have one payment with a lower interest rate than all of your other balances combined and it would actually save you money. As an example let’s say you have 3 credit cards, a medical bill and a car lease you had to turn in early that has a balance on it. Each one of these account will have differing interest rates if you have bad credit that means you probably hit some hard times and unfortunately had to miss a few payments which caused your credit score to skyrocket along with your interest rates. Using the same example let’s assume some initial interest rates on your accounts and because you missed some payments where they may be now:
Credit Card 1: 10% 29.99%
Credit Card 2: 16% 30%
Credit Card 3: 14.99 29.99%
Medical Bill: 7% 12%
Lease balance: 4.9% 17.99%
Paying more in interest than principal
Obviously, having your interest rates go up is not good. Reason being is that even if your monthly payments didn’t go up, which they most likely did, you would still have drastically less money going to pay off your prinicipal as more will be dedicated to paying off the interest on your balances. So what are you to do now that you are in this crappy spot.
Use Home Equity to pay off other debts
Well, it used to be that if you had equity in your house you might be able to refinance, pull some money out and pay off your higher interest rate balances and just add that amount to your monthly home payments. This wasn’t necessarily the worst idea back then because you could deduct your mortgage interest from your yearly income and the interest rate was usually way less than on these balances. However, we are living in much different times and equity loans are very hard to come by and even harder if you have bad credit. So, what are you two do.
Negotiate with your creditors directly
The reality is that if you have bad credit a debt consolidation loan may not be the best way to go. Negotiating directly with your lenders may be your best option.
Reason being is that many people are simply defaulting on their debts and creditors are more willing than ever to consider other options such as giving you a reduced interest rates, which could be essentially the same effect as a debt consolidation loan, or even better a settlement for less than you owe. There are other ramifications to consider if you are successful in negotiating a settlement agreement. The botton line is lending standards are much tougher today and if you are in over your head with balances that are impossible to pay debt consolidation is probably not your best move. Things change and eventually lending standards may be loosened but for now it tough.