If you have a lot of debt or different types of debt, then a debt consolidation loan may seem like a good idea. However, if you have low credit, you may not have many options.
The good news is that you can still get a debt consolidation loan even with bad credit. In this article, you will learn about the pros and cons of a debt consolidation loan, the pros and cons of getting one, and your alternatives if you are not ready to get a debt consolidation loan.
What is a debt consolidation loan?
A debt consolidation loan is a new loan that you take out to cover the balance of other loans. A debt consolidation loan is a separate large piece of debt, usually with better repayment terms than your original smaller debts. When you receive a consolidated loan, the balances of your other loans are paid off. This allows you to make one monthly payment instead of several.
For example, if you had one student loan for each semester of your four-year college education, you would take eight loans. This can be cumbersome to manage, so you can take out a debt consolidation loan to pay off all of your eight loans and instead make only one monthly payment.
Get a debt consolidation loan with bad or medium credit history
If you have bad or average credit, it may be difficult for you to get approval for a consolidated loan or a loan on favorable terms. A bad or average credit score is usually below 670. You will need to take steps to get a debt consolidation loan for bad credit history.
Step 1. Determine your credit rating
The first step to getting a personal or consolidation loan is to understand your financial situation. Your credit rating is one of the main factors that a lender will evaluate when deciding whether to grant you a debt consolidation loan. So take the time to find out your credit score and what events triggered it. Sometimes years of bad habits contribute to a low score.
Keep monitoring your account over time. You can find out what contributes to a good score, as well as what causes it to decline, and act accordingly.
Step 2: look for a debt consolidation loan
If you have a poor credit rating, you may want to take the first loan offered to you. However, you may have several options for dealing with lenders, so be sure to choose a good interest rate and term. You might want to research online lenders as well as regular lenders like your local credit union.
Be sure to carefully study all the fees associated with obtaining a personal loan. This could include a loan disbursement fee or a prepayment penalty. Understanding your fees can save you hundreds of dollars over the life of your loan.
Step 3. Consider a secured loan
Most personal loans used for debt consolidation are unsecured loans. This means that they do not require collateral. However, if you find it difficult to get approval for a loan, you may want to consider a secured loan.
The collateral includes a car, house, or other asset. The collateral must equal the amount of the loan if you do not repay the loan. Even if you can qualify for an unsecured loan, you can compare the interest rates on a secured loan to see if you can get the best rate.
Step 4. Boost your credit score
Finally, if you cannot get a loan right away, you can take some time to assess your credit rating and see where your options lie. If you have small glitches in your account that have led to a significant decrease in it, you can quickly raise your account.
For example, due to one missed payment or forgotten invoice, your account can plummet. In this case, you will be able to pay a small bill and quickly raise your credit score.
How to qualify for a debt consolidation loan
To qualify for a debt consolidation loan, you must be 18 years of age or older and be a legal US resident. You must also have a bank account and not be in the process of bankruptcy or foreclosure. These are the basics of getting a debt consolidation loan.
In addition to these basics, you will want to improve your financial situation as much as possible. Borrowers with good or excellent credit history and low debt-to-income ratios usually have no problem getting a debt consolidation loan. However, if you have a bad credit history, you will want to work on improving your credit rating and decreasing your debt-to-income ratio.
If you have bad credit and are considering a debt consolidation loan, you may already be in financial trouble. This can make it difficult to improve your financial situation. If so, you can look for lenders that specialize in helping people with bad or moderate credit history and be sure to look for the best rates and terms you can get.
Personal debt consolidation loans
If you have bad credit and need a personal loan, you can check these providers. They will offer loans at high interest rates to people with bad credit history.
Fiona
Fiona is an online marketplace that connects potential borrowers with multiple lenders. Borrowers simply fill out a quick application and are compared to the lenders most likely to approve them. This saves time and money as you can find a lender without having to visit many sites.
Fiona is ideal for borrowers with a credit rating of 580 or higher who don’t want to waste time filling out multiple applications. The nice thing about Fiona is that their initial application only requires a soft credit check, so filling out the application quickly won’t hurt your credit score.
Since Fiona is a marketplace and not a direct lender, the terms of offers and the number of offers borrowers receive may vary. Some borrowers report being bombarded with offers, which we believe is potentially beneficial as multiple offers help ensure you get the best deal.
LendingPoint
Lending Point usually provides a loan of up to US $ 25,000 at interest rates ranging from 15.89% to 35.99% per annum and for a period of 36 months. You can check your rate for free on their website. If you qualify, you can get a personal loan in just 24 hours. LendingPoint takes your credit score, work history and income into account when applying for a loan.
SoFi
SoFi will provide a loan of up to $ 100,000 with an interest rate of up to 17% for a 24-month period. There are no clearance fees, prepayment penalties and overdraft fees. You can apply online for free and will usually receive your funds within a few days.
Upstart
Upstart will provide a loan of up to US $ 50,000 at an interest rate of 7% to 35.99% for a term of 36 or 60 months. Funds are provided the very next day after approval, but they have a high commission fee of 8%.
OneMain Financial
OneMain will provide a loan of up to US $ 20,000 at an interest rate of 18% to 35.99% for a period of 24 to 60 months. They have small creation and late payment fees, but they usually run up to $ 30 per payment. You can apply for a loan online and receive it the very next day after you apply. The company also has nearly 1,500 branches across the country for those who prefer to apply for a loan in person.
Should I get a debt consolidation loan?
If you are in a difficult situation and need to consolidate your loans to make them more manageable, then getting an individual loan or a debt consolidation loan may be your best option.
pros
There are many advantages of a debt consolidation loan. Some of them:
- Simplified finance. When you consolidate your debt, you will pay off several debts and receive only one loan. This means that you will be making one monthly payment instead of several to keep track of them.
- Lower interest rates. If you have multiple credit cards or other high interest debt, interest rates can vary and be high. Personal loans usually have lower interest rates depending on your credit rating, the loan amount and the length of the term.
- Fixed repayment schedule. Instead of making several payments each month, which differ in amount, interest rate, and due date, you will have a fixed schedule for each month.
- Increase your credit. By eliminating the risk of forgetting to make a payment or letting your loans slip away from you, paying a set amount on a consolidated loan can help you improve your credit rating.
Minuses
Debt consolidation is not for everyone. Make sure you also understand the risks you are taking. Here are some things to watch out for:
- Upfront costs. Some personal loans are prepaid, including issuance, closing or annual fees. If you pay a lot of commissions over time, loan consolidation may not be profitable.
- Higher interest rates. If you have bad credit, you will not receive a favorable interest rate on a consolidated loan. Consequently, you may have a higher interest rate on a consolidated loan than on existing loans. In this case, consolidation most likely does not make sense.
The essence
A bad credit history does not mean that you cannot get a debt consolidation loan. However, it may be more difficult for you to get a loan immediately or at a favorable rate. If you decide to apply for a debt consolidation loan, be sure to look for the best rates and do your best to improve your credit.
This article originally appeared on Your Money Geek and has been republished with permission.