Bad Credit - Consolidation

Bad Credit Consolidation
Bad Consolidation Credit Debt Home Loan

If you are a homeowner with bad credit, it is possible to use the equity in your house to consolidate your debt. Such debt consolidation loans can reduce your debt and improve your credit rating by paying off outstanding debts such as credit card loans.

A debt consolidation loan is a sort of second mortgage that can be taken out on a home. The money from this loan is used to pay off all of the homeowner’s outstanding debts. The homeowner then has to pay off the loan much as they would pay off their mortgage.

Lenders are willing to give such loans to homeowners with bad credit because the loan is secured by the home much as a mortgage is. If the loan isn’t paid off the lender can simply foreclose on the home.

Advantages of debt consolidation

There are a number of advantages to such debt consolidation loans. One of the main advantages of such loans is that they can improve a person’s credit score. When the other debts are paid off the credit bureaus are informed. Credit bureaus usually raise a person’s credit score when debts are paid off.

Another advantage to a debt consolidation loan is that a person will only have one payment to make a month instead of several. This could make paying the bills easy and lessen the possibility of a missed payment.

Since only one payment is involved there is less possibility that a borrower’s account will be sent to collections because of missed or late payments. This can lessen the possibility that a person will be reported to collections agencies and have their credit score reduced.

Disadvantages of debt consolidation

The biggest disadvantage to debt consolidation through a home loan is that it can increase the possibility of foreclosure. If a borrower gets into a situation where they can’t pay home loans, the lender will foreclose.

A person can avoid this catastrophe by only taking out a debt consolidation home loan that they know they can pay back. If there’s any possibility that you won’t be able to make payments on it don’t take out a home loan. It’s better to live with a lot of debt than to loose your home.

Why you might not be able to get a debt consolidation home loan

It can be much harder to get a debt consolidation loan than people think because of the amount of equity in the home. Equity is the value of the home that exceeds the amount the house is mortgaged for. If a home is worth $200,000 but mortgaged for $150,000 the home owner has $50,000 worth of equity which means the homeowner can borrow $50,000 against the home.

If real estate prices fall, the value of the home falls and the amount of equity available is reduced. One danger that people who take out home loans for debt consolidation have to be aware of is the possibility that the amount of debt on their home can exceed the home’s value.

This means that people might not be able to sell their home because the sales price will not cover the mortgage. Nobody should take out a home loan on their house if real estate prices in their area are falling.