Many customers turn to bad debt consolidation loans when they have fallen behind with their repayment schedule. Once an account falls into a delinquent state, it will be passed to a collection agency so that the money owed can potentially be recovered. Consolidating debt not only simplifies family finances, it could also reduce the amount of money that is required to service debt repayments each month.
Advantages of Bad Debt Consolidation Loans
- Uncomplicated finances. Reaching an agreement with multiple creditors might not be practical. A secured homeowner loan can help to simplify personal finances because only a single monthly repayment will be necessary.
- Stop creditor harassment. Provided the new schedule is maintained, clearing outstanding debt with a poor credit debt consolidation loan will put an end to unwelcome creditor contact.
- Low monthly repayment. Spread the cost of repayment over an extended term so that a lower percentage of disposable income is needed to service debt each month.
- Defined loan term. Whilst credit card debt lacks a defined term, a loan for debt consolidation will clear unpaid debt in x years time.
- Borrow more. Subject to available equity and affordability, it may be possible to borrow a larger sum of money. Unsecured loans are usually capped at a maximum of $25,000.
Disadvantages of Bad Debt Consolidation Loans
- Home repossession. Failing to keep-up with the repayment schedule gives creditors the right to get a repossession order from the court. Whilst the lender is legally obligated to attain fair market value, the borrower is responsible for any repossession deficiency.
- Cumulative interest. Extending the term of a secured loan for debt consolidation will normally increase the cumulative amount of interest that is repaid over the life of the loan.
- Extra charges. There will be additional legal and surveyor fees for arranging a bad debt consolidation loan. These will increase the total amount owed.
- Short term borrowing. A secured homeowner loan isn’t suitable for short term borrowing. An early redemption penalty will be charged if the loan is redeemed before a pre-specified date.
- Higher APR. A low credit score means that borrowing money more expensive. The APR on a poor credit debt consolidation loan will normally be 15-25% – possibly more.
- No equity. An absence of equity means that it won’t be possible to borrow money.
- Borrowing too much. A number of homeowners get a bad credit secured loan for too much because they can suddenly afford a new car or a foreign holiday. This not only increases the necessary repayments, it could make it more difficult to move home in the future.
Loan for Debt Consolidation vs Debt Free Solution
The customer already has a poor credit history so consolidating debt won’t help maintain a good credit rating. A debt relief program, such as a debt management plan or debt settlement program, could provide an effective alternative to a poor credit debt consolidation loan. It doesn’t involve turning unsecured into secured debt which means that a creditor won’t be able to repossess the family home.