How Can I Get a Real Loan to Pay Off Debt If Credit Is Bad?

If your credit-card debt is rising quickly, don't be ashamed. You're far from alone. According to an April 2009 publication by The Nilson Report, the average credit-card debt for households that owned at least one credit card stood at $10,679 at the end of 2008. Fortunately, you can help pay down this debt with a home equity loan, even if you have bad credit.

Home Equity Loan

One of the main benefits of owning a home is that you build up equity as you make your mortgage payments over the years. You can then use this equity to pay for home renovations, cover your children's college education or, of course, pay down your credit-card debt.

The reason this makes sense is that home equity loans typically come with far lower interest rates than do credit cards. In November of 2009, Index Credit Cards reported that the average interest rate on consumer credit cards stood at 15.94 percent. Home equity loans, though, usually come with interest rates in the 6-percent to 7-percent range.

However, if you have bad credit, you may pay higher interest rates. That's because mortgage lenders will view you as a higher risk.

If you do take out a home equity loan to pay off your debt, don't make the mistake of running up your credit-card debt again. Many consumers do this. And once they've taken out a home equity loan, they have few options to help pay down their new debt.


You'll have to determine if taking out a home equity loan to pay off your debt is worth it. Most times, even with bad credit pushing your interest rates up slightly, it will be.

However, if you don't own a home or if you haven't built up enough equity in your home, you won't be able to go this route. In this case, you may consider a debt-consolidation loan. Under this process, a debt-consolidation service will provide you a loan that eliminates all or part of your outstanding debt. The goal is to take your multiple high-interest debts and consolidate them all into one single payment with a lower monthly rate.

You can usually obtain these loans even if you have bad credit. Be aware, though, that taking out debt-consolidation loans may further weaken your credit score. Many debt-consolidation services will also charge high commissions, sometimes as much as 10 percent of the loan. Be careful when working with these companies.

Other Options

If you can't take out a home equity loan, and you don't want to take the credit-score hit of a debt-consolidation loan, there are some steps you can take to pay down your debt without taking out a loan. In the process, you'll also improve your bad credit.

First, always pay more than the minimum payment required on your credit card. If you don't, you'll end up paying significantly more money in interest payments over the life of your debt. Secondly, make extra payments on your credit cards every time you come into unexpected money. These additional payments, even if they are small, will also cut down on the amount of interest you'll pay over the years.

Finally, stop adding debt to your cards. If you can't afford to buy something with cash, don't purchase it. You'll never pay down your outstanding credit-card debt if you don't stop adding to it.


About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.