How to Get Debt Consolidation with Bad Credit
Debt consolidation can be a useful way to get the money you owe under control.
But could it still be beneficial when you have a bad credit score?
This article will explain everything you need to know.
People who are suffering from high levels of debt often owe money to more than one source.
For instance, you might have debt across multiple credit scores.
Or, you could have borrowed from a variety of different loan companies.
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This is more common than most people realize and it means when you start paying your debt back, you’re paying multiple bills every month.
As well as being confusing, it can make the problem more expensive and far more difficult to deal with.
That’s why many people explore a debt consolidation solution.
As the name suggests, debt consolidation moves all money that you owe into one larger bill.
This can then be divided into monthly payments which is manageable and potentially more cost-effective.
Researching the market, you might find that a typical consolidation loan is not accessible for you.
This could be because you have a bad credit score.
Your credit score is a measurement of the risk you carry to lenders.
A poor credit score suggests to lenders that you will be less likely or less able to pay a loan back.
This can be a roadblock for many people who are trying to break free of the debt.
However, there are alternative options available.
You can consider using a bad credit consolidation loan.
Before you take this step, you need to weigh up the costs and concerns.
It is essential that a choice like this matches your financial requirements and your individual situation.
What Do You Need To Consider?
On the surface, a debt consolidation loan will always sound like a smart decision.
They are usually available with low-interest rates.
This makes it easier to pay back while one payment is far easier to manage than multiple repayments.
The interest rate is particularly important.
You must make sure that the rate of interest that you will pay on your debt consolidation loan is lower than the amount you are currently paying right now.
Remember, the majority of your monthly payments will go to the principle instead of the interest.
The interest rate is also an issue with bad credit loans.
Bad credit debt consolidation loans often will not provide a low rate of interest that you need and want.
Most people in debt are struggling with poor credit ratings.
This could be due to defaulting on the monthly payment or because by definition, debt means that you failed to pay bills that were owed.
A low credit score will also mean that the typical sources for a loan are off-limits.
This includes banks and building societies.
Many people who are in debt have a credit score that is above 600.
A score higher than this will likely make it impossible to access low rates of interest.
Instead, there are lenders that do provide debt consolidation loans specifically for those with bad credit.
The issue here is that the interest rates are upwards of 45%.
This means that a loan like this could easily leave you with an amount of debt that is virtually impossible to pay off.
Although, it’s still nowhere near as damaging as payday loans.
Loans like this can cause other problems too.
For instance, you might find that there are hidden fees.
These can end up doubling the cost.
That’s why you always need to make sure that you are reading the fine print and that you make a note of any areas that could be problematic.
Aside from the interest rate, there are other variables that you must keep in mind.
You need to be aware of any additional costs, and how much you will pay for the loan in total.
Make sure that you do check if there are any penalties for paying late or even paying off the loan earlier than agreed.
As well as this, you need to ensure that you can, in your current financial situation, afford the monthly payments as they are laid out.
Issues To Avoid
There are numerous issues with a debt consolidation loan that will suggest this could be the wrong choice for you.
Size does matter in this case.
Any loan over $10,000 will carry a substantial level of risk and will be far more difficult to pay off even in the short term.
Furthermore, you need to consider how your payments are managed.
Weekly or even bi-weekly payments can look like a far more attractive option, but they do come with problems.
For instance, most of these payments will go towards covering the interest.
Indeed, there are numerous signs that a debt consolidation loan will not be the right choice.
You could be at risk of losing your income.
If that’s the case, taking on a new loan will cause more financial stress.
You might not be able to get a large enough loan to consolidate your total debt, leaving you with multiple payments.
Furthermore, it is important that you avoid a situation where the debt-to-income ratio is going to be higher than 40%.
People often forget that debt consolidation is still a loan.
It can be a beneficial loan, but you will still be borrowing more money.
That’s why you need to ensure that what you borrow is going to reduce your debt rather than add to it.
The other point to remember about debt consolidation is that this isn’t a charity service.
Businesses that offer debt consolidation are looking to profit.
So, while you may be able to expand your level of repayments, this is also going to cause your recovery to last longer and lead to more accumulated interest.
What Causes People To Need Debt Consolidation?
People will often turn to debt consolidation when they have a variety of different unsecured debts from various sources.
This could include:
- Credit card bills;
- Utility bills;
- Cell Phone bills;
- Late car payments.
As these debts continue to build up over time, they can reach an amount that feels completely unmanageable.
It can also lead to all the money that comes into the account each month, draining away, leaving an individual with nothing.
This means that they need to borrow more money just to get by.
In this situation, debt consolidation can make a lot of sense.
But, before you decide that this idea is right for you, it’s worth considering other possibilities.
Alternative Options To Debt Consolidation
There are numerous options, aside from debt consolidation.
For instance, you can think about using a debt management plan.
Through debt management, you can work with a professional to ensure that you are able to repay your debts while guaranteeing that the cost is manageable.
While you will need to pay back all that you owe, you will be provided with an extended period to do this.
Some creditors are also willing to freeze interest.
If your only other option is a bad credit debt consolidation loan with a high level of interest, then this could be more beneficial.
However, a debt management plan will usually come with additional fees as well as the debt you are already paying.
Be aware that some creditors may not wish to be involved, leaving you with expensive repayments to handle outside this plan.
Another option would be debt settlement.
This can be suitable if you are unable to pay the bills that you have.
A settlement will allow you to consolidate the debt without interest and only pay a percentage of the debt you owe.
This is different from filing for bankruptcy.
The benefit of this is that the settlement will be binding for all creditors.
Preparing To Apply For Debt Consolidation
If you are interested in using debt consolidation, there are certain things that you must do before you can send off your application.
First, make sure that you only make one application.
Every time you apply for a loan, your credit score is going to take a hit and the credit bureaus will be informed of this.
As such, when they review your application, it’s going to negatively impact their perception of you if you have applied for loans multiple times.
You should also make sure that you have checked your credit report before making an application.
You can use TransUnion or Equifax to get a copy of your credit report free of charge.
Even though you can get the report for free, you’re still going to have to pay if you want to know what your credit score is.
Your credit report and score play an important role in whether or not you are approved for loans, so use the report to fix any errors or negative information if you can.
Managing to improve your credit score will increase your chances of being accepted for a lower interest rate.
So it is certainly worth taking the time to read through the report.
Use a fine-tooth comb, and anything that doesn’t look right should be changed as soon as possible.
Another thing that you need to do is have a budget ready.
Work out how much you can afford to pay per month without going further into debt, and use this to apply for loans.
Remember you shouldn’t be applying for any loans that are outside of the budget that you set up.
If you can’t find a loan that is going to fit in with the budget that you have already determined, then you need to look into alternatives rather than going into more debt.
There are tools that you can use online to help you calculate how much you can afford to make this process easier and more accurate.
What Does This Mean For My Credit Score?
You might be wondering how a debt consolidation loan will impact your credit.
If you go through the route of taking out a personal loan with a financing company, you’re still going to have a lot of debt.
It is true that this looks better than having a long line of missed payments on your record, but it doesn’t erase the debt that you have.
The higher your debt, the more your credit score is going to be impacted.
But, this isn’t the only thing that lenders can see, because they can also look at other factors such as subprime loans.
This isn’t going to work in your favor if you have to apply for another loan in the future.
It’s understandable that you’re going to be searching for a low rate consolidation loan because you don’t want to harm your credit more than you already have.
If you have poor credit, then harming your credit score further is going to be the last thing you need, which is why you find a lot of companies that lend money try to ‘level up’ the loan to improve your poor credit.
To do this, you need to make your payments for a specified time, and then the company lending money to you will increase your credit limit.
Or, they will offer you a lower rate loan but to get to this stage, you must have stable credit.
From the start date, there must be no new loans on your credit report, and nothing else that will keep your debt high.
Don’t make the mistake of ever upping your credit limit when you are already struggling with the debt you have.
Remember the end goal is to get out of debt, not add to the existing one.
If you want to know more about debt consolidation, or you are struggling to make a choice about the best way to handle your debt, get in touch with us.
A member of our team will be ready and waiting to speak to you so that we can get started advising you on your debt problems sooner rather than later.