How to Get Debt Consolidation Loans with Bad Credit

What is debt consolidation

Debt consolidation is a way to bundle all your high interest debts into one easily manageable and ideally lower interest loan. Multiple debts are consolidated into a single, larger liability, such as a loan, with more favorable repayment terms, such as a reduced interest rate, a lower monthly payment, or both.
Student loan debt, credit card debt, and other liabilities can all be addressed with debt consolidation.

The act of taking out a single loan to pay off many debts is known as debt consolidation. Secured and unsecured debt consolidation loans are the two types of debt consolidation loans available. Debt consolidation loans, lower-interest credit cards, HELOCs, and special student loan programs are all available to consumers. Debt consolidation has several advantages, including a single monthly payment rather than multiple installments and a lower interest rate.

How Does Debt Consolidation Work?

As a first step, most consumers apply for a debt consolidation loan through their bank, credit union, or credit card provider. It’s an excellent place to start, especially if you have a solid relationship with your bank and a good payment history with them. If you’re turned down, look into private mortgage lenders or companies.

Financial institutions such as banks and credit unions typically issue these loans, but there are also specialized debt consolidation service companies that offer similar services to the general public.

Debt consolidation vs. debt settlement

It’s worth noting that debt consolidation loans do not eliminate the initial debt.Instead, they merely move a customer’s loans to a new lender or loan type.

Debt settlement, rather than or in addition to a debt consolidation loan, may be the greatest option for true debt relief or for individuals who do not qualify for loans.Rather than reducing the number of creditors, debt settlement tries to lower a consumer’s responsibilities. Debt relief groups and credit counseling services are available to consumers. These companies do not offer loans; instead, they work with creditors to renegotiate the borrower’s present debts.

What Are the Different Types of Debt Consolidation?

Secured and unsecured debt consolidation loans are the two main types of debt consolidation loans.
Secured loans are those that are backed by a borrower’s asset, such as a house or a car.
The asset, in turn, serves as loan collateral.

Unsecured loans, on the other hand, are not secured by any assets and are therefore more difficult to obtain.They also have greater interest rates and lower eligibility requirements.Interest rates on these types of loans are often lower than those paid on credit cards.In most circumstances, the rates are fixed and do not change throughout the course of the repayment period.

You can combine your debts in numerous ways by consolidating them into a single payment.
A few of the most common are listed:

  1. Debt Consolidation Loans

Debt consolidation loans are available from a variety of lenders, including traditional banks and peer-to-peer lenders, as part of a payment plan for borrowers who are having trouble managing the amount or size of their outstanding obligations. These are designed for people who have a lot of high-interest debt and want to pay it off quickly.

2. Credit Cards

Another option is to transfer all of your credit card payments to a new card, this is called a balance transfer (credit card consolidation loans). If the new card costs little or no interest for a specified length of time, it could be a good idea. You can also use the balance transfer feature on an existing credit card, especially if the card gives a special deal on the transaction. Check out a list of different balance transfer options here.

3. HELOCs

Debt consolidation can also be done via home equity loans or home equity lines of credit (HELOCs).

4. Student Loan Consolidation

For people with student debts, the federal government offers many debt consolidation programs, including direct consolidation loans under the Federal Direct Loan Program. There are also private debt consolidation programs, which are often very cheap but can mean you lose access to federal benefits and debt forgiveness.

Benefits and Drawbacks of Consolidation Loans

There are benefits and drawbacks to consider if you are considering a debt consolidation loan.

Advantages

Debt consolidation is an excellent option for people who owe $10,000 or more on various debts with high interest rates or monthly payments. You can get a single monthly payment instead of many payments and a cheaper interest rate if you negotiate one of these loans. You can also look forward to becoming debt-free sooner if you don’t take on any new debt. If the new loan is kept up to date, going through the debt consolidation process can reduce calls or letters from collection agencies.

Disadvantages

Although the interest rate and monthly payment on a debt consolidation loan may be cheaper, it’s critical to stick to the repayment schedule. Longer payment plans result in higher long-term costs. If you’re thinking about consolidating your debts, talk to your credit card issuers to see how long it will take to pay off your debts at their current interest rate, then compare that to the time it will take to pay off the new loan.

There’s also the risk of losing specific school debt arrangements like interest rate discounts and other refunds. These provisions may vanish if you consolidate your debt. Those who fail on consolidated student loans can expect their tax refunds to be garnished and their income to be garnished, among other things.

Debt consolidation businesses are notorious for charging exorbitant upfront and monthly costs.
You might not even require them.With a new personal loan from a bank or a low-interest credit card, you can consolidate debt on your own for free.

Credit Scores and Debt Consolidation

A debt consolidation loan may improve your credit score in the long run.Paying off the principal component of the loan sooner will help you save money on interest payments, which means less money out of your pocket. As a result, your credit score may improve, making you more appealing to future creditors.

Rolling over old debts into a new one, on the other hand, may have a negative influence on your credit score at first. This is because credit scores prefer loans that have been open for a long time and have a consistent payment history.

Furthermore, canceling previous credit accounts and opening a single new one may limit the total amount of credit accessible, thereby increasing your debt-to-credit use ratio.

It is possible to get a debt consolidation loan even with bad credit but in order to do so you’ll need to prove that other areas of your financial life are in shape. For example you own assets like shares, property, bonds or commodities. The other is you have a stable and high salary and can demonstrate this.

How you can get a debt consolidation loan with bad credit?

If you’re trying to get out of debt and think a debt consolidation loan would help,on average you’ll need a credit score in the mid-600s, a track record of on-time payments, and enough income.

Every lender, on the other hand, has its unique set of standards. Begin by using the steps below to identify the best personal loans for debt consolidation and increase your chances of acceptance.

  1. Keep track of your credit score.

Lenders make loan decisions in in significant part on the state of your credit.
In general, the lower your credit score, the greater the interest rates you’ll be offered on loans.
You must meet the lender’s minimum requirements to qualify for a debt consolidation loan.
Although some bad-credit lenders may accept scores as low as 580, this is usually in the mid-600 area.

Many banks provide free tools for checking and monitoring your credit score.
It’s much easier to find lenders who are eager to work with you once you know your credit score.
There are lenders who specialize in loans for those with weak credit, and many of them publish credit score restrictions on their websites.

  1. Do some research.

Accepting the first loan offer you see is rarely a wise decision.
Instead, do your homework and compare loan amounts, terms, and fees from a variety of lenders, including local banks, national banks, credit unions, and online lenders.
This procedure will take some time, but it might save you hundreds, if not thousands, of dollars.

Online lenders may be the best place to start because you can typically see your rates with a mild credit check that won’t damage your credit score.
However, it’s also worth looking into what your current bank has to offer; if you have a solid relationship with a bank or credit union, they may be more ready to overlook poor credit.

  1. Take into account a secured loan.

Personal debt consolidation loans are usually unsecured, which means they don’t demand any kind of security.If you’re having trouble being approved for an affordable unsecured debt consolidation loan, you might want to explore a secured loan.

Secured loans demand security in the form of a vehicle, a home, or another asset.
If you default, the collateral normally has to be worth enough to cover the loan amount.
As a result, secured loans are often easier to obtain than unsecured loans, and you may even qualify for a lower interest rate.

  1. Be patient and work on improving your credit.

If you’ve looked everywhere and still can’t locate a loan that will help you save money, it might be preferable to wait and improve your credit score.

Make it a goal to pay all of your monthly bills on time for several months in a row.
It’s also a good idea to prioritize paying off credit card debt and eliminating all unnecessary monthly spending, such as subscriptions and eating out frequently.

It’s also a good idea to verify your three credit reports for inaccuracies, which you can do for free once a year (or weekly through AnnualCreditReport.com through April 2022).If you uncover any, you can dispute them with Equifax, Experian, and TransUnion, the three credit reporting companies.

Where can a person with terrible credit get a debt consolidation loan?

It can be difficult to know where to start with so many lenders available.
Here are a few solid starting points for your search:

Local banks and credit unions

When you apply for a personal loan, local banks and credit unions, like any other lender, will verify your credit. However, if your credit isn’t in excellent shape, some local financial institutions may be willing to give you more freedom, especially if you’ve already established a solid relationship with them.

Whether you’re a local bank or credit union member, you can speak with a loan officer to see if you qualify for a personal loan (and what the rate and terms are, if you do).The bank or credit union may consider your full financial history, personal circumstances, and relationship with the bank or credit union in addition to your poor credit score.

Lenders on the internet

If you have bad credit, online lenders are a fantastic location to seek for debt consolidation loans because they are more likely than a typical brick-and-mortar bank to approve you for a bad-credit loan.

When you use an online lender, you can usually:

-Rates can be compared without affecting your credit score.
-Apply online without having to fill out a lot of paperwork or going to a branch.
-You can get money within a week, or even one business day.

However, for bad-credit debt consolidation loans, online lenders usually demand hefty APRs.
You should also be aware of origination fees, which might increase your overall financing costs and reduce your loan proceeds.

Best debt consolidation for bad credit

According to reports, LendingClub requires a minimum credit score of 660.
On debt consolidation loans ranging from $1,000 to $40,000, APRs range from 7.04 percent to 35.89 percent.

There is no minimum credit score required for Upstart.
Loans ranging from $1,000 to $50,000 with APRs ranging from 4.37 percent to 35.99 percent may be available to qualified customers.

Avant‘s FICO score must be at least 580.
However, the majority of consumers who acquire loans have a credit score of 600 to 700, according to the business.You may be able to borrow $2,000 to $35,000 with an APR ranging from 9.95 percent to 35.99 percent if you qualify for financing.

On its website, OneMain Financial does not mention a minimum credit score, although it has a history of working with consumers with fair and low credit. OneMain Financial’s debt consolidation loans have an APR ranging from 18 percent to 35.99 percent, and consumers can get loans ranging from $1,500 to $20,000.

Debt Consolidation Requirements

Borrowers must have the requisite income and creditworthiness to qualify, especially if they are dealing with a new lender. A letter of employment, two months’ worth of statements for each credit card or loan you desire to pay off, and letters from creditors or repayment agencies are the most frequent pieces of evidence you’ll need.

After you’ve established your debt reduction strategy, think about who you’ll pay off first. In many circumstances, your lender will decide this, as well as the sequence in which creditors are paid.
If not, start with the debt with the greatest interest rate. If you have a lower-interest loan that is causing you more emotional and mental stress than the higher-interest loans (for example, a personal loan that has damaged family connections), you might want to start there.

Once you’ve paid off one loan, move on to the next in a waterfall payment process until you’ve paid off all of your obligations.

Debt Consolidation Examples

Assume you had three credit cards with a total balance of $20,000 and a monthly interest rate of 22.99 percent. To pay off the balances, you’d have to pay $1,047.37 every month for 24 months. This equates to $5,136.88 in interest alone over the course of the loan.

If you rolled those credit cards into a lower-interest loan with an annual rate of 11% compounded monthly, you’d have to pay $932.16 a month for 24 months to pay off the debt. This equates to $2,371.84 in interest payments. The monthly savings would be $115.21, resulting in a total savings of $2,765.04 over the loan’s term.

Even if your monthly payment remains the same, you can still save money by consolidating your debts.
Assume you have three credit cards with a combined annual percentage rate of 28%. (APR). Your credit cards are each maxed up at $5,000, and the minimum payment on each card costs you $250 every month. If you paid off each credit card separately, you would spend $750 per month for 28 months and pay $5,441.73 in interest.