Are you bogged down with debt and have a FICO credit score in the range of poor to fair? If so, a debt consolidation loan may well be worth considering.
However, getting a debt consolidation loan with bad credit can require some shopping around, but there are options.
There are some lenders who specifically cater for borrowers who have bad credit taking into consideration factors beyond your score including income, education and job history.
Using a single loan to pay off debt can be a smart way to save with a lower interest rate enabling you to pay back what you owe faster.
A debt consolidation loan enables you to borrow money to pay off your existing debts and make just one monthly payment going forward.
Generally, your new loan comes with more favorable terms than your existing one, such as a fixed interest rate and fixed repayment term.
For example, you may have a personal loan of $3,000 and a credit card loan of $5,000 which carry the same APR of 12%.
If you took out a debt consolidation loan of $8,000 with a 7% APR, you can simplify your repayment plan, pay less interest and save money.
How to get a Debt Consolidation Loan with Poor Credit
If you’re crippled with debt and thinking a debt consolidation loan could help, here we outline the best ways to improve your chances of approval in finding the right loan.
Double check your credit report:
It is always worthwhile scrutinizing your credit report, check for errors such as incorrectly reported missed payments, wrong accounts and inaccurate credit limits. Such mistakes may be the reason why your credit score is so bad.
Credit bureaus, also known as credit reporting agencies (CRAs), are organizations which collect and maintain consumer information.
The three major credit agencies in the United States are Equifax, Experian and TransUnion. It is possible to check your credit report for free once a year from these three agencies.
By even improving your score slightly could see you jump from a bad score of below 629 to a fair credit score between 630 and 689.
This could shave percentage points off your interest rate and secure the best consolidation loan.
Shop the market:
To get the best debt consolidation loan with repayments which fit your budget it is worthwhile comparing interest rates and terms offered by multiple lenders. Most online lenders can determine if you prequalify for a debt consolidation loan and you can determine your estimated rate and repayment amount. This typically involves a soft credit check which doesn’t affect your credit score. It is also worthwhile checking for any hidden charges or clauses in the loan fine print.
Performing such research does take time, but it may just save you money if you do it right.
Secured Loan or Co-Signer:
A debt consolidation loan is typically an unsecured loan, which means it does not require collateral.
If your finding it difficult to be approved for a ‘unsecured’ debt consolidation loan due to credit history, a secured loan is worth considering.
In certain situations, some lenders do offer secured loans which require some form of collateral such as a vehicle or home in covering your debt consolidation loan. Generally, the collateral must be worth enough to cover your loan in the event of a default.
Given this, it is much easier to be approved for secured loans and you may even qualify for a lower interest rate, making your repayments manageable and helping you eliminate that debt.
Certain lenders allow co-signers on a debt consolidation loan, which may make it easier for you to qualify for such a loan.
The co-signer’s credit score must meet or exceed the lender’s minimum requirement. To note, the co-signer will have equal responsibility for the loan, and both credit scores will be on the line for the duration of the loan.
Hold Fire and Improve your Credit Score:
If you have covered all avenues and are still struggling to be approved for a debt consolidation loan, it may be best to hold off until you can improve your credit score.
It is worthwhile considering ways to increase your income and pay off any small manageable debts you have.
This can improve your debt-to income ratio, this is how lenders evaluate your ability to repay loans.
Strive to pay your monthly debts on time each month and if you have credit card balances work to pay them down lowering your credit utilization rate.
All this can boost your credit score for the future.
Avoid Predatory Lenders
Finally, certain debt consolidation lenders can prey on borrowers who have low credit scores and are in high debt.
They often charge exorbitantly high interest rates; some are known to charge triple-digit APR’s.
We suggest you avoid these types of lenders at all costs, agreeing to a loan with such a steep interest rate can lead to an extremely expensive loan and may cause you to get yourself deeper into debt.
Don’t defeat the purpose of your debt consolidation loan which should help to ease your financial burdens.