If you’re battling to stay atop multiple debts each month, or you have high-interest debt you hope to refinance at a lower rate, a debt consolidation loan could work for you – even if you have bad credit. And, going into the process with a plan can help.
What’s Debt Consolidation?
Should you get a debt consolidation loan with bad credit? Well, let’s first take a look at what consolidation is. Basically, this is a new loan that you take out to pay off existing unsecured debt, such as credit card balances. The idea here is to find loan terms and an interest rate that you can handle.
Debt consolidation also enables you to pare credit card debt faster, which can improve your credit utilization ratio. In turn, this could help shine your credit score. Instead of making multiple kinds of debt payments monthly, which can be challenging to manage, a debt consolidation loan allows you to make a single monthly payment of the same amount each time.
A personal loan, which is what debt consolidation loans are, could also improve your payment history since you’re making just one payment monthly. Staying on top of such an arrangement is easier to do.
Such a loan could carry a lower interest rate than what you’re forking over on other debts. According to Credit Karma, the average credit card interest rate in the third quarter of last year was about 14.6 percent. However, the average interest rate for a two-year personal loan, which can be used to erase other debts, was only 9.34 percent.
Consolidation with Bad Credit
If you have a credit score of 579 or less, it can be hard to get a consolidation loan at all, let alone one with beneficial terms. Still, be mindful that your credit scores are only one of the factors that a lender considers when reviewing your application.
You should also note that if you are able to find a loan and you’ve had credit issues you may have to contend with higher interest rates. This could be problematic, as getting a lower interest rate is key to making a consolidation loan worthwhile.
The first thing you should do is examine your credit scores. Learning what your scores are will likely give you a better idea of which loans you aren’t eligible for and which ones you might be. By taking a close look at your credit report you could even find errors that, when fixed, could boost your scores.
You should also shop around. Now that you know where your credit stands, begin comparing terms offered by a mix of lenders. Such quotes can help you understand what choices you may have.
Prequalification, which only requires a soft credit inquiry, can also help you learn how likely you are to be approved for a certain loan. Making the actual application will necessitate a hard inquiry, however, which will shave a few points off your score.
In general, credit unions tend to be more flexible with loan requirements. Online lenders are often able to work with borrowers with bad credit as well.
You can also seek a cosigner – someone with good credit who will share responsibility for a personal loan. This tack is fraught, though, because if you fall delinquent, your friend or relative is on the hook for the loan.
Should you get a debt consolidation loan with bad credit? It depends. Before you commit to any loan, be certain to explore all your options. If you find a loan that works for your situation, make your payments on time each month. Over time, you can begin to improve your credit.