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Bad Credit Debt Consolidation Loans
Author David Schneider | Aug 29,2007
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Bad credit is sneaky. It can rear its ugly head when you least expect it. Bad credit is created by an accumulation of credit mistakes, overspending and events that you may not be able to control. However, you don't have to let the surprise of bad credit keep your finances in a state of shock. If you own your own home and have built up equity, then you have a couple of options for improving your bad credit by consolidating your unsecured debt.
Home Equity Loans
Your first option is to take out a home equity loan. Several mortgage companies specialize in home equity loans for people with less than perfect credit. Generally, you will need good to excellent credit in order to qualify for the best terms offered by a lender, but programs are available for people with FICO scores under 680. These programs generally have higher interest rates, but you have the option of paying down your interest rates at closing. Usually you will need to pay one percent of your loan value to reduce your interest rate by a quarter or half percent. This strategy will increase your upfront costs, but it will lower your overall costs.
You can choose from several home equity loans. You can generally borrow anywhere from 100 to 125 percent of your home's value (including your first mortgage). However, some programs will limit the amount of your home's appraised value that you can borrow from 75 to 90 percent. This information can be found in the mortgage company's financial disclosure or terms page.
Debt Consolidation Loans
While home equity loans and debt consolidation loans are similar financial products, they are not the same thing. Home equity loans can generally be used for anything that you want. Debt consolidation loans, on the other hand, typically have restrictions on how much of the loan's proceeds can be used for things other than paying off your credit card balances. This is because the qualification process for a debt consolidation loan usually looks at your financial position after your credit card balances are paid off. Keep this in mind when selecting your loan.
Making a Choice
The type of bad credit consolidation loan that you select will need to address your individual financial situation and needs. You will want to evaluate what you will be using the money to do. If you will only be using the money for paying off your credit card debt, then a debt consolidation loan is going to offer you the best terms. On the other hand, if you want to use the money for things other than just paying off some of your credit card debt, then you may find the conditions attached to a home equity loan more flexible. Next, you will want to determine how much of your home's value you need to borrow. If you don't have a lot of equity in your home then you may want to look for a loan that offers you a 125 percent loan to value ratio. Usually only a home equity loan will offer you this kind of borrowing option. |
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