Debt consolidation loans are one of the debt management strategies that allow you to combine multiple debts into one account. One of the most common ways to consolidate debt is by using a debt consolidation loan – a personal loan used to pay off multiple creditors.
What is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan used to combine multiple debts. These loans can make your debt more manageable – and you may get a lower interest rate, which saves you money in the long run.
How to Get a Debt Consolidation Loan with Bad Credit
If you are struggling to get out of debt and believe that a debt consolidation loan can help you, but you have bad credit – a FICO score below 669 or a VantageScore below 661 – it may be wise to follow these steps to find the right loan for your situation.
1. Check and Monitor Your Credit Score
Many banks offer free tools that allow you to check and monitor your credit score. Once you know your credit score, it becomes easier to identify which banks may be willing to work with you. There are banks that specialize in bad credit loans, but many also list credit score requirements on their websites, which can help narrow down your options.
2. Compare Offers
It is rarely a good idea to accept the first loan offer you see. Instead, do your research and compare loan amounts, repayment terms, and fees from multiple sources. You can find these loans at local banks, credit unions, and online lenders. This process may take time, but it could save you hundreds, if not thousands, of dollars.
3. Consider a Secured Loan
If you are having trouble qualifying for a regular debt consolidation loan, it may be beneficial to consider obtaining a secured loan. Unlike unsecured loans, secured loans require some form of collateral, such as a vehicle, home, or other assets. If you default, the financial institution will seize the collateral to recover its money. Because of this, getting approved for a secured loan is typically easier than getting an unsecured loan, and you may even qualify for a better interest rate.
4. Wait and Improve Your Credit Score
If you have tried everything and are unable to find a loan that helps you save money, it may be best to wait and spend some time working on improving your credit score. Make it your goal to pay your monthly debts on time for several months. It is also a good idea to focus on paying down credit card balances and reducing unnecessary monthly expenses.
You should also obtain a copy of your three credit reports, which you can do for free weekly by visiting AnnualCreditReport.com, and check for errors. If you find any errors, you can dispute them with the three credit reporting agencies, which are Equifax, Experian, and TransUnion.
Where to Get a Debt Consolidation Loan for Bad Credit
With so many lenders out there, it can be difficult to determine where to start your search. Here are some good places to begin looking for the right lender for debt consolidation.
Credit Unions and Local Banks
If you are a customer of a local bank or a member of a credit union, you can talk to a loan officer about whether you qualify for a personal loan – and what the rates and terms would be if you qualify. The financial institution may look beyond your low credit score and take into account your overall financial history, personal circumstances, and the relationship you have with them to approve you for the loan.
Lenders
Online
Online lenders are good places to look for debt consolidation loans if you have bad credit. They offer bad credit loans and typically have more flexible eligibility criteria than traditional banks. However, online lenders usually charge high interest rates and setup fees for debt consolidation loans for bad credit.
Three Best Lenders for Debt Consolidation for Bad Credit
Lender | Best for | Estimated Interest Rate | Loan Amount | Loan Term | Minimum Credit Score
Aavant | Consolidating a small amount of debt | 9.95% to 35.99% | $2,000 to $35,000 | 1-5 years | 550
Best Egg | Direct financing option for creditors | 8.99% to 35.99% | $2,000 to $50,000 | 3-5 years | 600
Upstart | Consumers with little credit history | 4.60% to 35.99% | $1,000 to $50,000 | 3 or 5 years | No requirements
How to Qualify for a Debt Consolidation Loan
Each lender sets its own requirements for borrowers seeking debt consolidation loans. However, here are some of the most common requirements you will need to meet to get approved for the loan:
- Be a U.S. citizen or permanent resident.
- Be at least eighteen years old.
- Not be involved in a bankruptcy or eviction proceeding.
- Have a debt-to-income (DTI) ratio below 45 percent.
- Have a credit score in the mid-600s.
While some lenders may approve a loan for you even if your credit score is below that threshold and your debt-to-income ratio is on the higher side, you will likely pay more in interest and fees. If that happens, it may not be worthwhile for you to apply for a debt consolidation loan, as you won’t be able to save money.
Alternatives to a Debt Consolidation Loan
If you do not qualify for a debt consolidation loan at a lower interest rate than what you are currently paying, you may want to consider some of these alternatives instead.
The do-it-yourself approach. Changing your financial plan without help from a third party requires dedication and time, but it is possible. Options include adjusting your budget, renegotiating your debts, and requesting a deferred payment history.
Debt management plan. A debt management plan (DMP) is a type of debt consolidation. You make monthly payments to a credit counseling agency to cover multiple monthly costs, and the agency negotiates with your creditors. Most plans take three to five years to complete.
Home equity loan. If you have a home with substantial equity, you may be able to take out a loan or line of credit or refinance to consolidate your debts. Before taking a loan against your home equity, consider the fact that your home is at risk if you cannot repay.
Credit counseling. A credit counseling agency can assist you by acting as an intermediary between you and your creditors. A credit counselor can help you understand your credit report and suggest steps to improve your credit score and achieve financial stability.
Debt settlement. Debt settlement companies work with you to settle your debts for less than you owe in exchange for a fee. However, you typically need to save a sufficient amount in an account with a debt settlement company before they start negotiating with your creditors – often at the cost of forcing you to fall behind on payments.
Bankruptcy. If you are facing financial hardship and it doesn’t seem like debt settlement is possible, bankruptcy may be the only option. Depending on the type of bankruptcy you file, you may need to place your assets under the control of the bankruptcy court and agree to relinquish most or all of your wealth.
Warning
Exploitive Lenders
Exploited loans are those that benefit the lender at the expense of the borrower. Exploitative lenders are relatively common in the bad credit field, as these companies exploit high credit loans from borrowers who have limited abilities to obtain a loan through traditional means. Warning signs include:
- Triple-digit interest rates and excessive fees.
- Pressure to act quickly.
- The lender asks you to lie on your application.
- Last-minute changes to fees or terms.
Accepting such a loan can be extremely costly and may push you deeper into debt. Additionally, using an exploitative lender undermines the goal of a debt consolidation loan, which is to facilitate getting out of debt, as you will struggle to keep up with higher payments.
Source: https://www.aol.com/debt-consolidation-loan-bad-credit-064108736.html
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