Having a Bad Credit Score Shouldn't Hold You Back When Looking at Debt Consolidation
Are you stressed about paying off multiple loans and credit cards each month? Do they all have different payment amounts and dates that can be confusing to remember? If you answered yes to either of these questions, then you might want to consider consolidating your debt to help ease the stress.
“Debt consolidation” is when you take out a single loan that will cover all your debts, such as credit cards, car payments, or student loans. Then you only have to pay one fee each month at one set rate of payment, which can improve your credit score and make your whole financial life easier to manage.
We are going to go into all the details you need to know about consolidating your debt, and then you can decide if this is something that will be of benefit to you.
What Are Debt Consolidation Loans?
A debt consolidation loan can be taken out with many different lending companies with various interest rates and fees. They are used to group all debts into a single loan with a single, fixed payment.
Depending on your credit score and financial history, you might be eligible for debt consolidation loans with lower interest rates than you are paying for now. However, even if you have a not so perfect credit score, there are still options for you, but probably with increased interest rates because you are considered a high-risk client.
Typical forms of debt people like to consolidate are credit cards, medical bills, payday loans, and personal loans. These agreements can be issued as secured or unsecured loans.
You can also consolidate your debt with a home equity loan, or a 401(K) loan, but these types of loans are hazardous as they can directly affect your home and retirement. If you are unable to make the payments, there could be long term consequences, and you can lose your home or your saved retirement funds.
What Is the Required Credit Score for Debt Consolidation
People with everything from “bad” to “excellent” credit scores can apply for debt consolidation. Where your credit score comes into play is how much the interest rates will be.
If you have a “good” to “excellent” credit score, then your interest rate will be low or even in some cases 0%. However, with poor credit, the rate could be as high as 35% on top of the amount you owe, which can lead to yet more debt.
A debt consolidation loan is an excellent option for someone who has multiple debts with high-interest rates or more than $10,000 of debt.
The most important reason you should consider doing this is that you want to get control of your debt, especially if once it is all paid off, you are intending not to get into debt again. For some, the only acceptable debt to have is a mortgage that is affordable for you, or student loans.
What Should You Examine When Looking at Debt Consolidation Loans
When considering which lending company to use for your consolidation, the number one thing to look for is the lowest annual percentage rates or APR. As mentioned above, the range of interest rates is quite broad, and different companies offer different options.
Take an honest look at your financial history, your credit score, and your salary, then look at companies that are the best for your profile.
Another thing to look out for are origination fees. This is an upfront fee that is charged for the processing of a new loan and is usually a percentage based on how much you are borrowing. The origination fee percentage can be anywhere from 0.5% to 1% of the amount borrowed. Some companies do not charge this fee, so be sure to do some shopping around.
Each company has its perks with lender features, such as a no prepayment penalty if you pay extra each month or pay off your loan early. Also, some companies have a hardship program in case there is an emergency, for example, you are laid off from your job, and you can no longer make payments.
Sometimes companies let you refinance the loan if the payments become impossible to pay. If it is allowed, it can lower your interest rate and make paying your debt off more manageable.
Follow These Steps to Get a Debt Consolidation Loan With Bad Credit
When it comes to debt, you have to review your spending habits and if you can stay within your means. If you have found yourself with uncontrollable debt, you will have to take it one step at a time to get back on track.
1. Keep an Eye on Your Credit Score
The first thing you can do is keep an eye on your credit score and find ways to improve it. The most active part of your credit score is based on your consistency in making payments on. Try to put enough money aside each month to be able to make those payments, and after a couple of months, your score will start to rise.
2. Research Different Lenders
Also, before you consolidate your debt, you should do some research about the different lenders, or even talk to a financial advisor who is experienced with this subject. Look to see which lending company provides the best service for someone with your economic history.
3. Take a Secured Loan
When thinking about which loan to apply for, you might consider a secured loan because they usually have a lower interest rate. However, there is more risk with this type of loan because if you put your home or car up as collateral, you will lose it if you are unable to make your agreed payments
4. Improve Your Credit Score
The above steps will help you to improve your credit score. This means you will be eligible for future loans at a better rate. Another option is to look at what could be removed from your credit file and negotiate with existing credit providers to remove late payment notifications from your credit history.
What Are the Benefits of Loan Consolidation?
There are various benefits to loan consolidation and here we will take a look at some of the factors that can make your debt management process more straightforward.
Single Monthly Payment
Debt consolidation is beneficial in many ways when managing your expenses. The most significant advantage of doing this is that you will only be responsible for one monthly payment, and one interest rate for all of your debts.
Lower Interest Rates
The APR tends to be lower with a debt consolidation loan than an average credit card interest rate. This is another plus of choosing a loan company that can take all of your liabilities and put them into one debt consolidation loan.
Potentially Better Credit Score
If you pay consistently or even pay off your loan early, it can significantly improve your credit score, which is advantageous in the long run. This can save you money in the future if you need to borrow again, and also provides the opportunity of getting a better rate further down the line.
Debt Consolidation Loan Alternatives
If you are denied by the lending companies, but cannot afford the hefty interest rates of the companies that have laxer approval processes, do not give up!
You can apply for a credit card with a sizeable available credit amount and transfer all your debt to that single card, but the rates here can also be quite high.
You can also apply for a home equity loan, but these also have a lot of risks because you are putting your house or retirement funds on the line.
It is also possible to ask a friend or family member to give you a loan to help manage your debt. Then every month you would be paying them, instead of a bank or lending company.
This works too because it is often interest-free, but you must be responsible and pay them back. You do not want to take advantage of a friend or family member who is offering their own money to help you out of a difficult situation
The Bottom Line
Making the decision to manage your debts properly is a great start. Debt consolidation can be a great way to make it less stressful, and can be the light at the end of the tunnel of a debt-free life.