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How To Get a Consolidation Loan With Poor Credit?

how to get a consolidation loan with poor credit

A well-termed debt consolidation loan may prove a viable solution to take control over your monthly payments. Still, finding an affordable loan to merge your debt when you have bad credit can be challenging. Even worse, getting a debt consolidation loan with bad credit may impose higher APRs than those on your existing credit lines. As a result, you run the risk of ending up wasting money on finance charges and interest.

While it’s possible to get a debt consolidation loan with bad credit, it’s essential to get familiar with the inherent benefits and drawbacks before applying. Below, you’ll learn the basics of debt consolidation loans, how to get one, and several plausible alternatives.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a credit line you can take to combine your existing debt and pay it off. Existing debt may include credit card balances and small loans. To do so, transfer the outstanding balances to the new loan and then execute single monthly payments on the debt consolidation loan. Basically, instead of five smaller loans, you’ll end up with a single bigger one with a consolidation loan.

When looking for the right product, it is vital to focus on more favorable terms than your present credit lines. Meaning, try to find a lower interest rate, unlike the one associated with your current debt. Your ultimate goal is to find more manageable loan terms and rates and manage your debt faster.

Pay off Your Debt Even if You Have Bad Credit

Paying off accrued debt is of the utmost importance even to individuals with bad credit. So, if you start contributing toward one consolidation loan, you will avoid paying multiple credit card bills. Even better, you get a fixed interest rate and one monthly payment. Credit cards have variable rates, with APRs and monthly payments constantly increasing.

Find out Where You Can Save on Interest

If you roll your credit card debt into a consolidation loan with an affordable interest rate, you’ll start saving money on interest. The same is valid for higher monthly payments since you’ll cover the principal. Hence, it’s crucial to understand the terms before committing. Lower APRs and more extended payment periods will help you pay less each month.

The average APR for consolidation loans in the US is around 22.59%.

Focus on Paying off Smaller Debts

Make use of the debt snowball method to become debt-free faster. This method will help you arrange debts from the smallest to the largest. What you must do is pay off the smallest debts first, even if other loans have higher interest rates. After the smallest debt gets repaid, put that payment toward the next-smallest balance until paid off. Keep rolling payments toward each consecutive debt until you have no debt left.

Figure out if a Debt Consolidation Loans Is Right for You

Consolidating debts may help you out financially if you’re persistent in your intentions. To do so, calculate the total amount you’ll pay with your current obligations. An online calculator or another tool may prove handy here.

Next, check the figures on a debt consolidation loan using the new amount and its interest rate and fees. Learn how much the interest will cost you each month and compare it to the rates of current loans. Consolidating your debt can only make sense if you save money.

The determining factor is usually the monthly payment. In case your current monthly payments are overwhelming, a consolidation loan might offer you debt relief. Still, remember that even if this helps you get back on track financially, you might end up paying more over the loan life.

Overall, consolidating debt can reduce interest expenses and grant a single, lower monthly payment. Yet, if you have a low credit score, be aware of predatory lenders with high rates and fees. In the end, it all comes down to your financial priorities.

As for the benefits of debt consolidation loans, consider the following:

  • Reduced number of payments each month,
  • Lower interest costs if you manage to get a low-interest rate loan,
  • Fixed monthly payment with a specific payoff date,
  • Possibility to get out of loan debt cycles,
  • Manageable monthly payment.

Getting a Debt Consolidation Loan With Bad Credit

You must meet the eligibility requirements first to qualify for a loan and consolidate debt. For example, consider the following to get a debt consolidation loan with bad credit:

  • You must be of age, or at least 18 years old;
  • Have a residential address in the respective state;
  • Decent financial history. A recent foreclosure or bankruptcy will damage your credit rating;
  • Have a recurring income;
  • Proof of financial stability. Some lenders might ask you to prove you are responsible with money.

Still, many will face significant obstacles when looking for a debt consolidation loan with bad credit. The first challenge is getting approval. If your credit score is below a specific threshold (most likely 580), some lenders won’t consider you.

Luckily, lenders look at various factors besides credit scores, such as your history and Debt-To-Income (DTI) ratio. In short, you don’t have to get ruled out due to bad credit only. Similarly, if you’ve struggled with credit, you will probably face high interest rates.

What Credit Score Do You Need to Consolidate a Loan?

Even a poor credit score may not disqualify you right from the start because creditors factor in other criteria, too. Yet, your credit score is among the decisive elements. Getting familiar with your FICO score will give you an insight into consolidation loans you can qualify for.

Also, check your credit report in detail to identify any errors that impact your score. If you spot any inconsistencies, you may take steps to debt relief.

Compare Rates and Research Lenders

It’s essential to compare interest rates and terms from various lenders to get a consolidation loan that fits your budget. To this end, you can pre-qualify with MoneyZap and check the estimated rates. Pre-qualification typically involves a soft credit check, which doesn’t hurt your credit score.

Moreover, it may prove beneficial to arrange a direct payment to creditors. Meaning, the lender will transfer the loan money to creditors, and you won’t get tempted to spend it elsewhere. MoneyZap has long experience working with reputable online lenders that offer the best debt consolidation loan for bad credit.

As for the APR, lenders base the percentage on the risk they are taking. This ‘risk-based pricing’ determines how risky a borrower you are. In a word, the lower the risk for the lender, the better the interest rate terms for you. Or, the lower your credit score, the more unfavorable the rates.

Sometimes the risk of approving a loan can be significant to creditors. As a result, some online lending companies require a FICO score of 640 or higher.

Last, consider your debt-to-income ratio. To do so, add up all your monthly debt payments and divide the figure by your gross monthly income. For instance, let’s say you are paying $1,900 a month for various loans. If your monthly pre-tax income is $4,000, your DTI ratio would be 47.5%. This figure might sound the alarm for lenders, who typically don’t settle for a debt-to-income number above 35%.

Applying for a Personal Loan With a 500 Credit Score

Remember to check your credit before applying. On average, the minimum credit score to get a loan stands at 580. Yet, creditors may look at other factors, including your income. If applying with a co-signer, their credit history and debts will get factored in, too.

Hence, don’t get discouraged if you want to get a debt consolidation loan with bad credit. Remember that credit scores are constantly in flux, so even if you have a poor lending history, you can improve it before applying.

Alternatives to Debt Consolidation Loans

Trying to get approved for new debt with bad credit can be a daunting job. On top of that, you might get high interest rates, similar to the ones you’re already paying. As a result, it’s wise to explore all the available options besides debt consolidation loans for bad credit.

Debt Management Plan (DMP)

The National Foundation for Credit Counseling is a US nonprofit financial counseling organization. Its member agencies across the country offer eligible citizens debt management plans. More specifically, DMPs are a kind of debt consolidation for bad credit. The program allows you to make a single monthly payment to your credit counseling agency and thus service multiple bills.

The agency will then pay each of your creditors on your behalf at a lower negotiated interest rate. Most DMPs will take three to five years to complete. If you arrange a debt management plan, a notation will get included in your credit report. This notation won’t harm your credit score, but lenders may hesitate to offer you new loans.

Debt Settlement Programs

This payment option includes an arrangement with the credit card company. Your ultimate goal in the negotiations is to persuade the card company to accept at least 50% of the owed amount. The downside of this program is that your credit report will get impacted for seven years. In the meantime, you could face problems getting other lines of credit.

Credit Unions

Credit unions may offer more flexible terms at affordable rates. For example, these nonprofits typically cap APRs at 18%, which is lower than what other lenders offer. Even better, some credit unions waive origination fees and don’t impose minimum credit score requirements.

However, banks and credit unions don’t allow clients to pre-qualify. So applying with them will mean running a hard credit check, thus hurting your score and making it harder to shop around.

Also, ensure you’re a member of the credit union to apply for a loan. In short, you must live or work nearby and pay the membership fee.

Payday Loans

Payday lenders offer fast funding through an online lending process. Funding typically takes place within a few days. MoneyZap requires a minimum credit score of 580 for consolidation loans up to $10,000. Plus, they have no minimum income requirements, but the starting APR can be high.

The drawback of payday loans lies in the interest rates that may reach 36%. Online lenders may also charge an origination fee. However, charges usually get deducted from the loan proceeds, so consider requesting a larger loan to get the amount you need.

401(k) Loans

401(k) loans come from employer-sponsored retirement accounts. Funds are easy to get since you’re borrowing your own money. Interest rates are cheaper than other types of credit, and the loan won’t appear on your credit report.

Conversely, messing with 401(k) plans can lower your living standard in retirement. This is because the borrowed funds get taxed twice. Plus, you’ll be contributing less to your plan since new contributions go toward paying off the loan.

Home Equity Loans

Owning a home or significant equity in it means you can take out a home equity loan. This loan may help you get a reasonable interest rate because your house secures the loan.

Note that although home equity can unlock financing sources at a lower interest rate, it isn’t a riskless process. If you can’t service your debt, you might lose your home to foreclosure. Hence, consider this option as a last resort and only if you’re confident you can execute timely payments.

Bankruptcy

Bankruptcy can save the day if you’re in a financial dead-end when debt settlement is off-limits. Depending on the bankruptcy type you file for (Chapter 7 or Chapter 13), the court may take control of your assets.

Declared bankruptcies will remain on your credit report for up to seven or ten years. As a result, you might need a credit counselor to tell you how to improve your credit score after chapter 7. But, overall, filing for bankruptcy can help you rebuild your finances over time.

Wait and Improve Your Credit Score

Suppose you’ve explored all your options and can’t find a new loan to pay off accrued debt; hold off a while. Instead, take time to boost your credit score and lower your monthly payments.

To do so, focus on paying installments on time for several consecutive months. Settling credit card balances and eliminating nonessential monthly expenses can help you, too. Finally, you can take advantage of credit counseling.

After a while, contact credit unions and online lenders to review your efforts. Then, get a debt consolidation loan by showing you’ve already taken steps to pay down your debt.

Consider A Secured Loan

Personal loans aimed at debt consolidation come as unsecured, so they don’t require collateral. Yet, if lenders reject you for an affordable unsecured loan, a secured loan could be worth trying.

Secured loans call for collateral, such as a vehicle, home, or other valuables. Such collateral must be worth enough to cover the loan amount if you fail to repay. The upside to secured loans is that lenders grant instant approvals, and you may snap up a better interest rate.

Get A Co-Signer With Good Credit Score For Your Loan

Having family members or friends with good credit scores willing to help you can resolve your financial worries. By co-signing their name on the application, you will benefit from their good FICO score.

Yet, this option isn’t risk-free. For example, if you don’t make timely payments, your credit score will suffer. On top of that, the lender will withdraw the funds from the co-signer. Hence, ensure your relative understands what’s at stake before co-signing.

Final Thoughts

Many borrowers with bad credit struggle to keep track of several loan repayments each month. Others have high-interest debt and wish to refinance at a lower rate. In that case, a debt consolidation loan can be the perfect solution even if you have below-average credit.

However, bad credit may diminish approval odds. Even if you get the green light, rates and terms of debt consolidation loans for bad credit may be unfavorable. Origination fees can further worsen the situation.

Before you agree on a loan, explore the available loan options. Then, once you choose the right loan amount, always pay on time. This way, you can improve your credit over time and get access to higher loan amounts at reasonable rates.

Article contributors

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Frank is a graduate of the Master's program in Economics Sciences. He has been passionate about writing in the financial niche. He enjoys discovering new ways to improve personal wealth and sharing them with his readers. In addition, Frank likes to travel and play board games.

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7 Comments. Leave new

  • The loan to consolidate your loans with a small interest rate is a good option if you can find some. This way you will have only one loan but make sure you can pay it on time to avoid penalties.

    Reply
  • If you have a lot of smaller loans than it is wise to get rid of them one by one starting with the highest interest rate.

    Reply
  • If the consolidation loan is with good terms it is better to take one and get rid of all the depts and small loans

    Reply
  • It is very difficult to get any loan if your credit score is bad. Or you will get a loan with high interest rates which means that it is better to get rid of the old loans and improve your credit score

    Reply
  • Lenders base the percentage on the risk they are taking and the APR is considered according to that. Try different lenders because the percentage may vary.

    Reply
  • You can negotiate with the lenders to postpone payment of the credit for some time if you are unable to pay the installments

    Reply
  • If you want to take a loan you have to explore all the options and to try to get the best of it- low interest rates and APR

    Reply

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