How to Get a Debt Consolidation Loan for Bad Credit
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If you’re struggling to pay off multiple debts, a debt consolidation loan can help by consolidating all of your debts into one loan, streamlining repayment and often lowering your interest costs.
A low credit score shouldn’t stop you either. You can find debt consolidation loans for bad credit, although you may pay a higher rate than borrowers with higher credit scores.
Here’s how to get a debt consolidation loan for bad credit – and some other debt repayment options you might consider.
If you’re looking for a loan to consolidate your debt, visit Credible to see your prequalified personal loan rates.
1. Check your credit
You should always check your credit before applying for a loan. Not only will your credit history and credit score affect your ability to get a debt consolidation loan, but they will also influence the interest rate and loan terms a lender offers you.
You may be able to get your credit report online for free through your bank or credit union. Some credit card issuers also offer free credit score monitoring. If this is not the case with your bank or credit card company, you can visit AnnualCreditReport.com to request free copies of your reports from each of the three major credit bureaus – Equifax, Experian and TransUnion.
Once you have your report, go through it line by line. If you spot any errors — things like accounts you don’t recognize, misreported late payments, or unrecognized debts in collections — alert the office you pulled the report from. Fixing these issues could improve your credit score and help you get a lower rate on a loan.
2. Improve your debt ratio
Your debt-to-equity ratio — or how much of your monthly take-home pay is spent on your credit cards, loan payments, mortgage, and other debts — also influences your loan options and interest rate.
To improve your chances of getting a loan with an affordable interest rate, take steps to improve your DTI ratio before you apply. Paying off some of your debts is a good place to start, or you could ask your boss for a raise to boost your income. Taking a side gig or more hours at work can also help you pay off some of your debt sooner.
Consider adding a co-signer
You can also consider adding a co-signer to your loan. As long as they have good credit, it could help you get a loan (and potentially get better rates too). Just make sure your co-signer understands the obligations that come with co-signing a loan: if you don’t make your payments, they’ll be responsible for making them instead. If they don’t repay the loan, it could hurt your credit scores or lead to collection attempts.
3. Compare debt consolidation loan rates
Comparing interest rates is essential when getting a debt consolidation loan, as it directly affects both your monthly payment amount and the long-term costs of the loan.
Lenders can vary widely on the interest rates they offer, so be sure to consider at least a few different companies for your debt consolidation loan. The lower your interest rate, the more money you’ll save in the long run and the lower your monthly payments will be.
Credible lets you compare personal loan rates from various lenders, without affecting your credit score.
Benefits of a debt consolidation loan
A debt consolidation loan, sometimes called a credit card consolidation loan, can offer many benefits:
- Streamlines the reimbursement process — Rather than making several installments for your debts each month, you will only make one. This could facilitate budgeting and expenditure planning.
- Reduces your costs — A debt consolidation loan often comes with a lower interest rate than some other types of debt, such as credit cards, saving you money monthly and over the long term.
- Can improve your credit — Since you will be using a debt consolidation loan to pay off multiple debts at once, it may improve your credit score initially. And with just one monthly payment to track, it can also help you avoid making late payments in the future, which also improves your score.
How to qualify for a debt consolidation loan
Each lender has their own requirements for a debt consolidation loan, but here are the factors that generally come into play when evaluating your loan application:
- Credit score — Most lenders want to see a minimum credit score of 580-650 to qualify you for a loan. Some lenders have no credit score requirements, but they will likely charge a higher interest rate for someone with a low credit score.
- Debt to income ratio — You will generally need a DTI ratio of 43% or less to qualify for a loan, although some lenders allow up to 50%.
- Revenue — You will most likely need to provide proof of employment when applying for a loan. Lenders want to make sure you have a steady income and job to show that you are able to repay your loan. You may need to provide documents, such as pay stubs, W-2 forms, or bank statements.
If you don’t meet all of the above requirements, be sure to contact multiple lenders and shop around. Since lender requirements vary widely, you may still qualify for a debt consolidation loan with bad credit.
You can use Credible to compare personal loan rates from different lenders in minutes.
Alternatives to Debt Consolidation Loans for Bad Credit
Debt consolidation loans aren’t your only option if you want to pay off your debts more efficiently. If you can’t qualify or can’t get an affordable rate, consider these alternatives:
Home equity loan or home equity line of credit (HELOC)
If you’re a homeowner, you may be able to tap into the equity in your home to pay off your debts using a home equity loan or home equity line of credit (HELOC). The big advantage here is that home equity loans – and most mortgages for that matter – tend to have much lower interest rates than other financial products, including credit cards and personal loans. . HELOCs also have relatively low interest rates, but they work more like a credit card – you get a revolving line of credit that you can use as needed.
However, these financial products involve risks. For one thing, they’re using your home as collateral, so if you don’t repay the loan, you could put your home at risk of foreclosure. Also, if your home loses value, you could end up owing more on your loan than the property is worth. This is called being upside down on your mortgage.
Sign up for a debt management plan
A debt management plan, or DMP, is another option to consider. You can find them through credit counseling agencies and debt relief companies.
With a debt management plan, you will make a one-time payment to the debt relief company each month, and then the credit counselor or debt relief professional will pay your individual creditors on your behalf. DMPs can sometimes lower your interest rate and help you pay off your debts faster.
To learn more about DMPs, contact a debt relief or credit counseling company in your area. The National Foundation for Credit Counseling is a good place to start if you’re looking for free nonprofit resources.
Debt settlement occurs when a creditor (your credit card company, for example) agrees to let you pay off your debt in full, but for less than the balance you actually owe. To do this, you usually have to negotiate directly with your creditor or go through a debt relief company, which will negotiate on your behalf.
While debt settlement has its benefits (you pay off your debt for less than you owe), it can also have some downsides. You may have to pay high fees if you go through a debt settlement company. On top of that, it can also hurt your credit score, which can limit your financial options in the future.
As a last resort, you can also consider filing for bankruptcy, which could erase many of your debts. But keep in mind that you could also lose assets in the process, like your car.
Bankruptcy will stay on your credit report for seven to 10 years, depending on which type you file for. This stain could hamper your ability to get a loan or even secure an apartment for many years to come. For these reasons, you should only consider bankruptcy as an absolute last resort.
If you are considering going bankrupt, talk to a financial adviser or seek advice from a bankruptcy lawyer. They can help you make the best decision for your finances now and in the long term.
A debt consolidation loan is the first step
Getting a debt consolidation loan can help you settle your debts – often more affordably and efficiently – but you’ll also need to get to the root of the problem and figure out what caused your credit card debt in the first place.
If you need help budgeting or learning how to better control your spending, talk to a credit counselor. You can also hire a financial planner to help you manage your finances or meet your savings and investment goals.