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It may seem that consolidating bills into one, presumably lower, payment would be a good idea. But in actuality, it can actually be a dumb thing to do if you have bad credit.

One of the reasons a bad credit debt consolidation loan can be dumb is due to the nature of the debts. Most of the time, if someone has a lot of different bills, they are from unsecured debts like those arising from credit cards. These debts do not give lenders any kind of automatic recourse in the case of a default or late payments. To try to get any money from a debtor who can’t pay, or who puts them on a low-priority status, an unsecured lender has to sue. This can be costly and time-consuming, plus, many if not all states have laws prohibiting the seizure of certain assets in these types of cases. Poor credit unsecured loans are generally the worst loans out there and if you have them, they are going to be super expensive.

Debt consolidation loans, on the other hand, are often secured. In simple terms, a “secured” loan is one in which a borrower offers assets as collateral. This means that lenders can take that collateral in the case of missed payments. Since debt consolidation loans often turn out to be quite large, the collateral for them is usually the applicant’s house. I would recommend taking a lot at a non profit debt consolidation company. You may need to improve your credit to qualify, but you need to do that anyway.

With the aforementioned facts in mind, it’s clear that taking a bad credit debt consolidation loan is a dumb idea. These loans convert unsecured, hard to collect, debts into secured loans. Secured loans can easily result in assets being taken by creditors. Since the debtor has granted security, there is almost no red tape for a lender to go through before it can take the assets when a payment is missed.

Since a person’s credit only becomes bad if they’ve had a hard time paying their bills on time, chances are very good that there will be late or even missed payments in the future. The fact that consolidation loans tend to use the house as collateral raises the risk to such debtors to astronomical proportions. Therefore, while it is always a dumb idea to turn unsecured debt into the secured variety, it is even dumber and riskier for someone with bad credit.