When a homeowner gets into trouble financially, the first thought that comes to mind is to obtain a bad credit home equity loan. Is that always a wise decision? Is it better to obtain an equity loan to get rid of those past due bills or to contact a debt management counsellor and work out a payment plan?

Home equity loan

When you find yourself in severe financial trouble, before you decide to apply for a bad credit home equity loan, consider the facts:

You can lose your home if you default on the payments

The interest rate will be higher because of your credit

Your equity will be tied up in the loan and not available for other purposes

Your home's equity is all you have left after your credit has gone downhill because of financial difficulties. If you tie it up in paying the past due bills, that leaves you with nothing in the event something happens that you need to make substantial repairs to the house. The idea may sound good at first, but when you consider that paying off those old bills will not remove them from your credit report for six or seven years after you have paid them, it may not be the best solution to the problem.

Debt management

Unlike a consolation loan, debt management does not cost you any additional interest nor is it an actual loan. What happens is a debt counsellor works with your creditors in order to work out a payment plan that allows you to repay the debts. Quite often they are also able to have the interest rate lowered or eliminated, something that is not done with a bad credit home equity loan. Because of the reduced interest rate, it's possible to have your debts repaid quicker than you would be possible with an equity loan. In addition, you still have the equity in your home in case something major should come up where you really need it.

The effect on your credit

Keep in mind that a bad credit home equity loan is a consumer loan, and it will show on your credit report. In some ways, this is good because if you make the payments on time, it gives you something positive to offset the negative. On the other hand, if you need to apply for a car loan sometime in the future, it will affect your income to debt ratio.

Since a debt management program is not a loan, it will not affect the income to debt ratio. You are repaying old debt rather than creating new debt. Surely, the old debt is still on your credit until it is paid in full, as opposed to being marked as paid. The final decision is that of the homeowner, but from a purely economic view, debt management is the least costly.

Bill Stone writes for Direct Online Loans who help homeowners find the best available loans via the http://www.directonlineloans.co.uk website.

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