Although borrowing has almost always been common in America, the level of indebtedness of American households has undoubtedly increased over the years. Are you also having financial difficulties and seeking a way out? Before concluding that bankruptcy is the ultimate solution to get out of indebtedness, it is good to find out about the other options available to you. Debt consolidation is one of them. It allows you to pay off your multiple debts with a single monthly payment faster and with a much lower interest rate. But in case of bad credit, is debt consolidation accessible?
In this guide, we tell you everything about getting a consolidation loan with poor credit in 2022: how it works, its advantages, and disadvantages.
What Is a Debt Consolidation Loan?
Debt consolidation is an option to consider when a person is overwhelmed by their debts to several creditors on the verge of declaring bankruptcy. A debt consolidation loan combines all your multiple outstanding debts, such as payday loans, into one payment. The main advantage is the stability of the new payment, which, thanks to a lower interest rate, allows the debtor to save a significant amount of money. Moreover, having a single payment makes it easier to manage your finances. You, therefore, don’t juggle between a multitude of bills.
Advantages of Obtaining a Debt Consolidation Loan
If you’re feeling overwhelmed by bills, a consolidation strategy will get your mind in order. Here are some of the benefits it offers:
- A simplified payment schedule. Financial planning becomes easier since you only have to make one repayment per month.
- You will have the upper hand in your financial situation before bankruptcy becomes your only option. Combining various loans into one personal loan makes debt management more straightforward. When you have only one amount to repay, you get higher chances to keep track of it, which will help improve your credit score.
- You’ll pay off your debt faster by lowering your monthly interest rates. If you pay a lot of interest (for instance, if you pay off your credit card debt at a rate of 19.9%), consolidation could also be a winning option for you.
- Since it will eliminate high-interest debt more quickly, you’ll save money in the long run.
Debt Consolidation and Bad Credit: What Is the Connection?
Of course, debt consolidation has a direct link with your credit score. Good credit reports earn you more trust with financial institutions. On the other hand, bad credit history is one of the variables that make your options more limited, not making debt consolidation impossible.
Online lenders or other financial institutions will grant you debt consolidation loans provided you have a stable and sufficient income. Having assets, like a house or a car, paid for in part or in full could tip the scales in your favor.
The Influence of Creditworthiness on the Loan Terms Offered
The lending institution tries to assess lending risk before signing the contract accurately. It retrieves specific data about the applicant from a credit-reporting agency to check the creditworthiness. The lender weighs up whether the client can repay the personal loan regularly based on this information. The worse the credit score is, the higher it classifies its own risk and the worse conditions it offers the customer. In other words, the better the customer’s credit score, the better the consolidation loan interest rate offered and vice versa.
5 Steps to Get a Debt Consolidation Loan With Bad Credit
You probably understand that hundreds, if not thousands, of services are ready to help you pay off your credit card debt. Below we outline a few steps to help you navigate the process of applying for a debt consolidation loan faster and easier.
Monitor Your Credit Score
As stated above, your credit score is crucial in determining your creditworthiness. It works as a cumulative grade point average ranging from 250 to 900. Your credit score will go up or down with every debt-related transaction you make. Timely, full payments improve a score, while late, short, or missing payments damage it. A credit score of 670 or higher will put you in a good enough position for approval for any loan or product.
As a consumer, it is your right to know what is in your credit history and verify that there is complete and accurate information since your future application depends on it. Request a free copy of your credit report from Equifax, Experian, or TransUnion, three major bureaus. Review your statements to estimate how high the chances of finding a good lending institution are.
Explore Multiple Lender Options
Compare loan terms offered by various financial institutions and find the best loan offer. Ensure that the interest rate and the payment period are advantageous and reasonable. And, more essential in this situation is to check if you can repay the consolidation amount. The will is not enough; you should do the calculations too. Accepting the first loan offer you find on the Internet is not a good idea. Compare the repayment terms and interest rates of multiple lenders to choose the one that corresponds to your needs and wishes.
Gather Your Application Data
Most lenders require the following information when you apply for a debt consolidation loan: your annual income, the name of your employer and how long you have worked there, your social security number, your total outstanding debt, a summary of your household expenses, and whether you rent or own your house.
Think of Secured Loan
The secured personal loan is protected by specific assets. Anyone who grants a personal loan with bad credit wants to stay sure they get their money back. Therefore, some banks or online lenders require collateral for the loan to avoid any surprises in the event of the borrower’s insolvency or late payment.
There are no specific requirements when determining the collateral for a loan. The collateralized item should be something that will not fluctuate in value: car, boat, home, stocks, etc. Because of these precautions, it is easier to get approved for a secured loan than an unsecured one. The possibility of getting a lower interest rate is another advantage.
Apply for the Loan
Once you’ve found the best conditions to consolidate debt, it’s time to apply – but start with just one loan application. Applying for several personal loans at once in a short period can influence your credit report. It reduces your chances of getting the loan approved and increases the interest rate.
Beware of Predatory Lenders
Certain companies advertise that they pay out consolidation loans to clients with bad credit. With slogans like “loans no matter what your score is,” they intentionally try to attract customers with bad ratings or without a fixed income. Analyze such offers with skepticism because they often hide a cost trap that further aggravates the financial situation.
To avoid stumbling upon a dubious lender, consider these tips:
- You should refrain from debt consolidation loan providers that promise immediate and unbureaucratic help or extremely high loan amounts without checking your creditworthiness. It also applies if the loan is paid out to people without a fixed income or the borrower does not provide collateral.
- Any initial costs or brokerage fees that should be paid before the loan is approved betray dubious lenders. Intermediaries can charge a brokerage fee after the loan agreement has been signed. And good providers do not charge a fee for their services because they receive a commission from the bank in return.
- If the provider insists on a home visit to sign the contract, all the warning lights should come on. Under such circumstances, they could put them under pressure and force him to sign a contract quickly without having the opportunity to check all the papers. Such predatory lenders cannot give you a helping hand in covering your existing debt.
- Consider the option of online lenders. After all, compared to banks, you have the chance to compare rates without affecting your score. Besides, applying online saves you time and effort, and the money will be credited to your account as soon as possible.
Can a Lender Deny My Application?
Some financial institutions apply stricter rules than others for their clients’ processing options. However, lenders or banks look at several critical points of the borrower’s profile, such as their income, credit score, and past and present debt issues. So, before you apply wherever you are, consider the following factors:
One thing to remember is that lenders are businesses like any other. They strive to be sure of two things: their customers can pay them back, and they can make a profit. If your income is so low that the lender feels you won’t keep up with your monthly payments, your application may be denied.
The Current Debt Level Is Too High
While the whole point of a debt consolidation loan is to allow you to pay off your other debts, if lenders find that your current debt load is too much to handle, it may also result in your application being denied. Again, lenders want to know first and foremost that their customers can repay them.
What to Do if Your Request Has Been Refused?
If your application for a debt consolidation loan was declined, or you think it might be, there are things you can do to improve your chances of being approved, now or in the future.
Maintain a Healthy Budget
If your debt levels are out of control, the first and most straightforward solution is to make a reasonable budget and stick to it. Use some of your savings to manage your debts. Living below your means will also be worth it.
Seek Advice From a Credit Counselor
As mentioned above, one of the main reasons a financial institution denies your application is that your credit report is unsatisfactory. If this is the case, you can try credit counseling. Counselors are trained to deal with all sorts of clients’ financial situations. Regardless of your level of indebtedness, credit counseling should give you the solution you need without judgment. The higher your credit score is, the better your chances of being approved for debt consolidation loans.
Consider a Debt Management Plan
When you arrange the DMP, you’ll work with a trained professional who will assess your finances, create a personalized plan, and may even negotiate with multiple lenders to lower the interest rate or eliminate penalties. The main goal is to consolidate debt into one monthly payment that is affordable and easy to manage with the help of a professional.
Alternatives to Consolidation Loans to Get Out of Your Credit Card Debt
Have you tried in vain to find debt consolidation loans with bad credit? Rest assured! You have other alternatives at your disposal. Here they are:
The Repayment Agreement With Your Creditors
An informal agreement is an informal negotiation between you and your creditors concerning the repayment of your debts. A prerequisite of the repayment arrangement is that you have a clear understanding of how much money you earn each month and how much you can pay off your lenders. Discover how to set up an agreement to get the best chance of finding common ground with your creditors.
Home equity loans and lines of credit are both considered “second mortgages.” Each type of financing allows you to borrow against your equity. A home equity loan is funded in a lump sum of cash, similar to a personal loan. You will have fixed interest rates and make fixed monthly payments over the loan term. A HELOC is a revolving line of credit, similar to a credit card secured by your home. The payment amount depends on how much you borrow. Choose this path only if you are sure that you can handle the inevitable financial problems that come with it.
If the proposal of getting a debt consolidation loan is out of reach, the ultimate solution remains personal bankruptcy. It allows you to free yourself from all your big debts except for non-dischargeable ones. It wipes the slate clean of your past and lets you start from scratch to rebuild your financial life on solid and lasting foundations.
To get a debt consolidation loan with bad credit, you should properly analyze your financial situation and find the ideal lenders. Correctly carried out consolidation of personal loans will reduce the payment burden on the borrower. However, debt consolidation entails both positive and undesirable consequences. Borrowers should calculate future costs carefully, with even the most minor nuances of the procedure considered, to reduce the risk of force majeure caused by inappropriate usage of loans.
What Credit Score Do You Need for a Consolidation Loan?
Your credit report is a record of how you manage your obligations towards lenders or banks. The data is then aggregated and calculated to obtain your credit score. It represents the risk of whether or not lenders can expect you to repay the debt consolidation loan according to the agreement you make with them. If we talk about a “good” score, it’s somewhere between 650 and 700. Although the general purpose of scores is universal, each lender will use its criteria to assess a person’s creditworthiness.
Can I Get a Debt Consolidation Loan With a 640 Credit Score?
Sure. Each lender determines the range of credit scores that they consider good or bad. The lending institution is your best source of information about the link between your credit report and their final decision. Some companies pay less attention to it or offer higher interests rates to grant bad credit borrowers a chance to get out of their indebtedness.
Why Can’t I Get a Debt Consolidation Loan?
Not everyone gets the opportunity to benefit from debt consolidation: before granting a loan, financial institutions carry out a realistic assessment of the financial solidity of the requesting consumer. Reasons for rejection of consolidation requests include:
- An insufficient level of income.
- Age restrictions.
- Bad credit history.
- Misleading the creditor.
- Errors when filling out the application.
- Reconsolidation of personal loans.
As a rule, companies reject applications due to typos or non-compliance of the client with the requirements. After correcting the errors, you may resubmit the application.
Why Do Lenders Check the Credit Score of Their Applicants?
Law obliges lenders to carry out a credit check via a specialized agency before granting a personal loan. In this way, lenders can protect themselves from financial losses. At the same time, the borrower is protected from taking out debt consolidation loans that do not suit their financial requirements or exceed their budget.
Is Debt Consolidation the Right Solution for Me?
If you have several debts with high-interest rates and face difficulties repaying them, debt consolidation may be the right solution. However, you should have a good credit score, enough income to make the monthly payments, and a desire to control your finances.