A debt consolidation loan is used by a lot of consumers who are struggling with multiple debts. It is a type of debt solution that will combine your various credit accounts into one big loan. The process involves borrowing a huge sum of money that will allow you to pay off your original debts. This will leave you with one huge balance under one lender.
It is important for you to realize that you did not just pay off your debts. You only transferred it into another loan so you can accomplish a couple of things.
The first is to simplify your payment process. You no longer have to track multiple payments and due dates. There is only one debt left and that is all that you have to focus on. It will be easier to manage your monthly payments and it will lower the risk of you being late on anything.
The second accomplishment after a debt consolidation loan is you have the chance to improve your payment terms. For instance, if you want to shorten your repayment plan so you can get out of debt faster, you can apply for a short-term loan. In case you want your monthly payments to be lower, you can apply for a longer repayment plan so your balance will be stretched. This will result in a lower monthly payment for you.
The third thing that you can accomplish with this debt solution is getting a lower interest rate. In fact, this is the primary reason for most people to consolidate debt. They want to grab the chance to lower their existing interest rate. One of the criteria that you should look for in a loan is a lower rate than your current average. It does not make sense to consolidate your debts if you will end up with a higher interest rate anyway.
Of course, getting a lower interest rate is not something that lands in your lap easily. One of the ways to guarantee a low-interest rate on your debt consolidation loan is to have a good credit score.
But what if you have a bad credit score?
Before we answer that question, let us identify the reasons why your credit report matters in the first place.
Why is your credit report important in debt consolidation loan?
Your credit score is a measurement of your creditability. It is calculated based on a formula that involves the data in your credit report. This report contains all your credit transactions. There are three important reasons why the data in this report is important for debt consolidation lenders.
It measures how responsible you are with credit. To start with, the data in your credit report will tell lenders if you are a high-risk or low-risk borrower. It will show if you pay your dues on time or if you maintain a healthy level of debt as it relates to your credit limit. A high credit score indicates that you are a low-risk borrower. That means you can be trusted to pay off the loan. If you have a low credit score that means you are a high-risk borrower. There is a higher chance that you will not pay back the loan once it is given to you.
It helps you get a low-interest rate. A good credit standing means you can also be given a low-interest rate by your lender. Most of the time, the interest rate is determined by the risk that they have to make when they lend you the money. If you are a high-risk borrower, they will be forced to give you a higher interest rate so they can protect their profit. But if you are a low-risk borrower, that protection is no longer necessary. The lender can give you a low-interest rate on the loan.
It gives you more loan options. Finally, your credit report will help you have an easier time finding loan options. If you have a bad credit standing, you only have a few options when it comes to borrowing money. After all, not all lender will willingly loan you any money if they know that there is a chance that you will not pay them back. But with a good credit score, you can apply for a loan with any lender. You will have the best terms – at least, compared to those with poor credit. By having more choices, you have more chances of finding the right terms that suit your debt and financial situation.
What debt consolidation loans can you get if you have a good credit?
In case you have a good credit rating, you have more choices before you. But if you have to make a choice, here are the top three options that you should look into.
Debt consolidation loan. This is a type of unsecured loan that is specifically used to consolidate multiple debts. When you are approved to borrow this type of loan, the lender will be the one to distribute the money to the different creditors and lenders that you have. Since this is an unsecured loan, you need to have a good credit score to get a low-interest rate.
Personal loan. This is another unsecured loan that you can borrow to consolidate your debts. It is different from a debt consolidation loan because once the loan is approved, the money will be sent to you. That means you will be in charge of distributing the money to your different creditors and lenders. If you do not have self-control and you think the money will be in danger of being used somewhere else, then you should opt for debt consolidation loan. But since you have a good credit score, that means you can control your spending urges without a problem. As long as you can get the personal loan with a low-interest rate, then this should work out just fine for you.
Balance transfer. The final option that you have to consolidate your debt with a good credit score is balance transfer. This involves a new credit card that offers 0% interest during the first few months. Usually, you get at least 6 months to have that introductory rate. During this time, all your payments will go to the principal balance. After the introductory promo, the interest rate on the card will be higher. If you live on a frugal budget during the 0% interest, you can maximize your payments and thus pay off a significant part of your debt. Of course, the transfer will cost you. The usual transfer fee is 3% of the balance. So if you transferred $10,000, you need to pay $300.
Since you have a good credit score, it is even possible to not need debt consolidation loan at all. Your credit records can place you in a position wherein you can negotiate with creditors and lender to give you better rates and terms.
What debt consolidation loan options do you have with bad credit?
So what happens if you have a bad credit score? That does not mean you can no longer borrow a loan. It is still possible for you to get a loan to help you consolidate your multiple credit accounts. You may still be approved for a debt consolidation loan or personal loan but it will be with a higher interest rate. In case that does not sound appealing, you have other options before you.
Home equity loan. If you have a bad credit score, you need to give the lender another guarantee that you will pay the loan. That means you need to have a collateral. The most common secured loan that you can use for consolidation is a home equity loan. If you own equity in your home, you can use that to get a loan. By using your home as collateral, you can convince a lender to loan you enough money to consolidate. Of course, you need to make sure that you pay off this loan because if you fail, you will lose your home.
Loan with a co-signer. If you cannot get a debt consolidation or personal loan on your own, you have to option to resubmit your loan application but this time, with a co-signer. This co-signer should have a good credit score. Admittedly, it will be hard to find one because it has to be someone who trusts you enough to pay the loan. Because if you fail to pay back the loan, the cosigner will be required to pay in your place. In case you find one, you need to make sure that you will value your relationship with that person. Because if not, you might be tempted not to pay the loan and lose that person forever.
In case the other two options are not okay, then you may have to forget about getting a loan. You need to go for an option that does not involve borrowing money – but will still allow you to consolidate.
Debt management. The first option involves a credit counselor who can help you assess your debt and financial situation. This is needed for you to create a Debt Management Plan or DMP. This is a repayment plan that is best suited to your payment capabilities. This will be presented to your creditors and lenders for approval. Once they approve, all the credit accounts involved will be frozen – so you will not be allowed to use any of them. You will then pay a single monthly amount – based on the DMP. It will be sent to the credit counselor who will be in charge of disbursing the money to your different creditors and lenders.
Debt settlement. The other option that you have is debt settlement. If you need a debt reduction, this is the best option to pursue. This involves negotiating with your creditors and lenders and convincing them that you can no longer afford to pay the loan according to your original terms. You will ask them to allow you to pay a settlement amount that is smaller than your outstanding balance. Once that payment is made, they should agree to forgive the rest of the debt. Make sure that if they agree, you will get a written document that certifies the settlement agreement. Take note that any amount forgiven will be considered taxable income. If you are interested in this option, you can check with us if you qualify for debt consolidation. National Debt Relief has debt experts on standby to answer all your questions about consolidating debt. The initial consultation is free so you do not have to worry about being obliged to pay or sign up for anything.
Where can you apply for debt consolidation loan if you have bad credit?
In case you will insist on using a debt consolidation loan despite a bad credit, the next challenge is finding a lender who can give you the best terms considering your credit situation.
Credit union. This is the next best thing to a traditional bank. But instead, these financial institutions are run by the members. If you are a member of a credit union, you can try your luck borrowing with them. They are known to offer lower interest rates despite a bad credit standing.
Family loans. If you have a wealthy relative or family member, you can try to borrow money from them. In case you find someone who is willing to trust you with a family loan, make sure you document everything. Come up with a repayment plan and sign it. Make sure you follow through because you will compromise your relationship with the lender if you mess up your payments.
Debt consolidation lenders. These are online lenders that primarily offer to consolidate your multiple debts. These lenders can offer you rates and terms despite your debt credit standing. However, you need to be cautious because some of them might be scammers. You need to be careful about who you will choose to help you consolidate with a loan. Do your research about them and read debt consolidation reviews. You want to make sure that the company is legit and can really help you with your debt problems. Most of the time, reputable lenders can offer you different loans even if you have a bad credit score.
What can you do to improve your credit score before debt consolidation loan?
If you have a bad credit score and you insist on using debt consolidation loan, you can always improve your credit standing before you apply for the loan. You simply have to postpone your plan to consolidate for a couple of months so you can work on improving your credit standing. Here are some tips that will help.
- Check if your credit report is accurate. Believe it or not, some people end up with a bad credit score because they have incorrect entries on their credit report. You have every right to dispute an incorrect entry – especially those that are caused by identity theft. Make sure you prepare your documents so you can prove that the entries are incorrect. These might be the reason why your credit rating is down.
- Check what is causing your score to go down. If it is not an incorrect entry, it might be caused by bad financial habits. Try to identify what these are so you can work on developing the right habits that will help you bring your score higher.
- Make sure you pay your dues in time. Late payments can really bring your credit score down. This is why timely payments are very important. Make sure all your debts are current. Try to pay them off days before or set up reminders that will ensure that you will not miss out on a payment.
- Do not borrow too much. Your credit utilization ratio is the relationship between your credit balance and your credit limit. If your limit is only $10,000, your balance should never be more than 30% or $3,000. In case you are within that amount, stop using credit for the moment.
- Negotiate old entries. If you filed bankruptcy in the past or went through a foreclosure, these can haunt your credit report for a couple of years. If a good amount of time have passed since then, it might be best to negotiate with the three major credit bureaus (Experian, TransUnion, Equifax) and ask them to remove the entry from your report. That should help give your score a big boost.
Having a good credit score takes a lifetime of effort. Make sure you develop the right habits that will maintain a good score – after you have worked hard to bring it higher. When you get an approval for a debt consolidation loan, you can use this as an opportunity to bring your score higher. You simply have to stay true to your payment terms and commit to your monthly contributions. Slowly and surely, you will swing from a bad credit into a good one.