Advantages and Disadvantages of Debt Consolidation Bad Credit

Debt consolidation is a strategy of debt management that can be advantageous to its users, as it turns many payments into one monthly payment, which may be lower than the total of the small payments. This method of debt management is done by combining small loans and debts into one larger loan, with a lower interest rate and a longer term of repayment. Many methods can be used to consolidate debt, and each have certain advantages and disadvantages according to the individual's financial situation, including a debt consolidation bad credit loan. The first method of debt consolidation is to transfer high interest debt to a credit card with a lower interest rate. The debt can be transferred to the credit card once the credit card company is provided with the relevant information, such as the balance of the debt, the issuing bank, and the account number. Usually credit card companies issue convenience checks that are used to pay back debts, transferring the balance. However, such a transaction will carry a fee, and a lower interest rate may be limited to a certain period of time. The home equity loan is also an option for a debt consolidation bad credit loan.

A home equity loan is an alternative offered by many banks and mortgage companies, and is a loan against the equity an individual has in their home. Lenders will extend a home equity loan for up to 80 percent a home's equity. To qualify for this debt consolidation bad credit loan, homeowners must complete the application and approval process, with financial disclosure forms to prove their ability to make payments, and with this loan a home appraisal must be performed to determine the actual level of equity. There are also certain loans that are only meant for debt consolidation. Debt consolidation bad credit loans also require a loan application process with financial information provided to show the borrower's ability to make the monthly payments. Interest rates on debt consolidation loans are higher than rates offered for home equity loans and some collateral may be required for larger loan amounts. Debt consolidation bad credit loans can offer many benefits to those with bad credit.

The greatest advantage of a debt consolidation loan is that it offers the convenience of making just one monthly payment, rather than making many small payments. Another advantage of this debt management program, is that it offers savings on interest rates, as they offer lower rates than the many debts they replace. The monthly payments on consolidation loans may also be less than the total of the smaller debts, which gives individuals an additional financial benefit. There are also some disadvantages to consolidating debt. For example, if a home equity loan is acquired, and the loan goes into default, then the lender may foreclose on the home to recover the debt. The term of a debt consolidation bad credit loan can also prove to be a challenge for a person considering the loan. If the consolidation loan has a longer term than the existing debts it is replacing, then more interest may be paid over the longer term, even if the interest rate is lower, so there may be no savings, even with a smaller monthly payment.