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Can You Get a Consolidation Loan with Bad Credit?
Bad credit hits you like a hard rock when you least expect it. Once you miss payments your debt will keep growing and so will the interest rates.
Falling behind on your payments will give you a bad credit score. Your best option is to apply for a consolidation loan. However to get a consolidation loan you need to have a good credit score.
What many people don't know is that there is a chance to receive a consolidation loan even with bad credit. This might sound a bit absurd because a bad credit score means that you are not good at keeping up with your payments.
A debt consolidation loan might be a good idea but the terms and rates may not be attractive. Moreover, it might lower your chances of improving your credit score.
What is a Consolidation Loan?
With the correct loan information, things will be easier for you. If you have multiple debts which you have failed to pay, then a consolidation loan will be beneficial. It is simply a loan which you take out to pay multiple personal loans at once. The consolidation loan has a fixed rate which is basically paid within a period of 12-24 months.
A consolidation loan has a low-interest rate compared to the other multiple personal loans combined. So when you take a consolidation loan you are going to pay the high-interest debts with a single low-interest loan.
Should You Take out a Debt Consolidation Loan?
Once you choose to get a consolidation loan with bad credit there is no difference to getting another type of loan. When you have bad credit many traditional lenders are not willing to give you any type of loan.
If there is a lender who will give you a consolidation loan then they are going to charge you high-interest rates. This begs the question: is the loan even worth it?
You may find that even the loans you are trying to consolidate have lower interest rates. Moreover, there are lenders who will put you in a debt cycle. Therefore when you try to consolidate your loans,it could leave you in a worse situation than you were in previously.
If you choose to take out a consolidation loan, consider the following factors:
Do your research before taking the loan.
Compare different lenders with their annual percentage rate (APR) to determine which consolidation loan best suits you.
Check your monthly paycheck and determine if you will or will not be able to pay the loan.
Advantages of a Consolidation Loan
Lower monthly interest
One monthly payment
Even with bad credit, one can get a consolidation loan with collateral
Disadvantages of a Consolidation Loan
Higher rates than a home equity loan.
You pledge property risk once you back up your loan with collateral.
The interest rates are much higher especially if you have bad credit.
Debt Consolidation Options for People with Bad Credit
Before proceeding with a debt consolidation plan, it is best to look at the various options at your disposal. Some of these options include:
Debt Management Plan
A debt management plan (DMP) is also known as a credit counselling service. DMP is offered by a member of a not-for-profit agency. They are mostly offered to individuals who have bad credit and cannot qualify for a consolidation loan.
The agency will pool all your unsecured loans into one monthly payment. It will then divide the payments among your creditors with the ones you owe more getting the highest payment.
Your credit score does not matter with DMP. Actually, your credit score will not change until you finish the program.
Advantages of a DMP
Reduced interest rates
Consolidation plan even with a bad credit score
It is a voluntary process
Disadvantages of a DMP
Your credit score will not change until you finish the program.
It is not a legal procedure since it is a voluntary process.
Transfer Balance to a 0% Interest Card
There are credit cards which have 0% initial interest between 12-24 months. You could transfer balances of your other credit cards to the 0% interest card. This will help you pay off your debts faster.
A debt settlement usually involves your credit to be paid off. You will need a debt settlement company which will contact all your creditors to negotiate a settlement usually between 40%-60%.
A creditor will only allow a debt settlement if you pay off a large sum of the debt. However, this can be a risky process since the credit impact may get you sued.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes