Debt Consolidation with Bad Credit

Written by lifang January 09, 2008 13:07

Virtually every adult in the country will have a credit report. This is a computer file stored on a database that will contain information on your personal details and status, you income, your occupation, the amount of outstanding debt you have and your past record of paying off loans. Lenders will then use this information to assess your credit worthiness, or in other words, the level of risk involved in lending money to you.

Lenders are really interested in one thing when they look at your credit report, and that is the chances of you failing to repay the loan in full and on time. If they conclude, based on the information available to them, that there is a high chance that you will repay the loan in full and on time, without any difficulties, then they will be very willing to lend money to you and will offer you loans and other forms of credit on very attractive terms.

However, if they have to conclude that there is a high risk that you will not repay the loan on time or in full, then they will be less enthusiastic about lending you the money. If they are willing to lend you any money at all, it will be on less attractive terms and higher interest rates to reflect the increased risk involved in lending to you.

However, these days, with credit becoming more and more available to almost everyone, the incidence of people becoming unable to meet all their repayments, and suffering difficulties in servicing all their debt, is increasing. This is leading to an increased number of people falling into a position of getting negative credit report entries and thus their credit worthiness decreases.

Almost every morning when you look through your mail there will be offers for personal loans and credit cards, and in almost every store that you enter, you will be offered a store card or other form of credit that is designed to get you to spend ever more money, often at very high interest rates.

Another trend that is increasing, as credit is becoming more and more available, is the popularity of debt consolidation loans. One of the main reasons for the growth in popularity of these loans is the fact that credit is becoming so freely available.

Debt consolidation loans are designed specifically for people who have taken on too much short term debt, in the form of credit and store cards, bank overdrafts and similar loans. These are usually charged at extremely high interest rates, often at rates in excess of thirty per cent.

In order to get these high interest loans under control, people take out a debt consolidation loan that is an amount sufficient to repay the existing debts. This loan will be fixed at say five years, and at a fixed interest rate of say eight per cent. This means that the interest repayments each month on the consolidation loan will be far lower than they would be for all the other short term debts. You are given the advantage that the debts will be fully repaid at the end of the term of the loan, something that is unlikely if you pay the minimum payments on a credit card balance.

You are also given the advantage of only having to make one repayment each month which makes budgeting a lot easier and also decreases the probability that you will miss payments and thus become subject to late payment penalties and other similar fees.

For these reasons, if you have a lot of outstanding high interest debts, such as the ones listed above, then it is often a very good idea to consolidate them into one low interest loan.

The only problem with this strategy is that if you are already suffering problems with your payments then your credit report and credit rating are likely to have already suffered as a result. This may make it difficult or perhaps impossible to get a debt consolidation loan. This has the harsh result that for those people who may be most in need of debt consolidation, the option may not be open to them as they are unable to secure the loan in the first place.

The good news is that if you are a house owner, you will stand a very good chance of securing this type of credit. Usually, no matter how bad your credit has become, if you own a house and are in a position to offer it as security against the loan, then you will probably be able to secure the credit you need. You should be very careful about doing this however as you will be replacing a number of unsecured loans with a secured one which will give the lender a direct right to seize and sell your home if you default on the loan. Therefore, before opting for a debt consolidation loan, make sure you are able to keep up with the proposed repayments.