How To Get A Debt Consolidation Loan If You Have Bad Credit
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It’s easy to get burdened with high interest rate debt, in particular. If you have debts from multiple lenders. In order to stay afloat, you can make monthly payments that only cover interest, making virtually no progress towards paying off the principal balance.
But there is a way forward. Debt consolidation is a strategy that combines multiple debts into one payment at a lower interest rate, which can help you get out of debt faster. “If you have high interest debt under different accounts, consolidation is your best option,” says Michael Foguth, founder of Foguth Financial Group, a financial planning firm in Detroit.
One option is a debt consolidation loan, which is a type of personal loan issued to pay off debts. You then make payments on that loan instead of multiple creditors. But to get the best rates, you need to have good credit.
Debt Consolidation Loan Alternatives
A debt consolidation loan can be the best solution for managing multiple high interest debts. However, this option is not available to everyone, especially when you have poor credit. If you have bad credit, you can work on improving your credit before you consolidate your debt. There are also other alternatives to a debt consolidation loan.
1. Negotiate with lenders
One option is to contact your lenders and negotiate to reduce the interest you pay on each debt. It may seem like a far-fetched scenario, but if you have a good repayment history, lenders will be more than willing to work with you to keep you.
2. Credit counseling
You can usually find free or low-cost credit counseling service from a non-profit organization. Emphasis is placed on education and capacity building in debt management. Credit counseling can also help break bad debt habits and establish a foundation of financially healthy behaviors to help prevent future debt scenarios. The National Foundation for Credit Counseling is a great place to start your research.
If your debt is completely unmanageable, you’re struggling to keep up with your bills, and finding other options to consolidate, negotiate, or settle your debts with lenders doesn’t work, you may want to consider bankruptcy as a last resort. Bankruptcy is considered an extreme measure and an option of last resort as it will stay on your file for up to 7 or 10 years, depending on the type of bankruptcy you file.
How To Get A Debt Consolidation Loan With Bad Credit
A credit score of 720 or better is best in order to get great rates and terms on a debt consolidation loan, according to Foguth. If your FICO score is below 600, it can be difficult to qualify for debt consolidation loans. A score below 580 is considered bad credit, according to the credit reporting company Experian, which will make it more difficult to qualify for this type of loan. Because the goal is to get a lower interest rate, you want to increase your chances of getting good loan terms.
Applying for a loan when you are sure you are approved is the ideal situation, as refusing a loan can have a negative effect on your credit score.
Here are some steps you can take to position yourself to get approved for debt consolidation loans.
1. Check your credit score and examine your credit report
You can get a good understanding of your creditworthiness if you check your credit score and examine your credit report. You can get a free copy of your credit report at annualcreditreport.com. Doing this in advance will help you avoid surprises when applying for a loan. When you review your credit report, identify any items that negatively affect your credit, such as errors. You can dispute any discrepancy by contacting the assessment agency with supporting documents.
2. Pay your debt on time
Financial institutions want to grant loans to customers with a good payment history. Paying your bills on time and catching up on your debt payments makes you a more attractive borrower. If you’ve missed a payment, you can call your lender and negotiate to avoid a penalty on your credit score and save money on late fees.
3. Optimize your current credit
Ideally, you should keep your debt ratio below 40%. For example, if you have a $ 1,000 credit limit, don’t carry more than $ 400 on that card, Foguth said. This suggestion applies to all of your lines of credit. One tactic is to work to get your debt ratio below 40% before applying for a debt consolidation loan. Additionally, you may want to avoid the temptation to open a new credit card. It is not wise to apply for new credit if you are considering consolidating your loans, as it will likely have a negative impact on your credit score.
4. Get a co-signer
If you have a family member or friend with good credit ready to co-sign a debt consolidation loan, this is an option to consider. By adding their name to the application, you will benefit from their good credit history. However, there is a significant downside. If you don’t pay off your loan on time every month, their credit score will suffer. Make sure your family member understands what’s at stake before you co-sign, and you need to be prepared to commit to paying your bills on time until the loan is over.
Where To Get A Debt Consolidation Loan With Bad Credit
When you are ready to apply for a debt consolidation loan, it pays to be prepared. You will need to provide information regarding your various debts, interest rates and loan terms.
Banks, credit unions and other financial institutions offer several options for debt consolidation loans. It is important to shop around for the lowest interest rate and the best deal for your situation. “Don’t settle for the first offer you get,” Foguth said. “If you have average to good credit, you’re in charge; take it to your advantage. If you have bad credit, consider improving your credit before applying for a debt consolidation loan.
1. Brick and mortar locations
Going to multiple physical locations to find a loan can be time consuming. But investigating your options in person will prevent your information from being widely shared with other institutions. If you have a good relationship with your current bank, this is a great place to start. You can then visit other places to get more deals before you make a decision.
2. Online destinations
Buying online for a loan is convenient. It gives you a greater number of institutions to consider for your debt consolidation loan and can sometimes offer lower rates. However, this method carries the risk that your information will be shared with other companies beyond your control. “The Internet is great for shopping, but businesses will sell your information. As a result, you will receive multiple calls. If that’s right for you, this might be the best option for you, ”Foguth said.
How to handle debt consolidation
Once your debt consolidation loan is approved, your debt will be under one institution. This should make it easier to keep track of your bills, but you’ll still need to take proactive steps to manage your loan.
1. Create a budget
To take advantage of debt consolidation to pay off your debts, you have one major obligation: make payments on time and in full every month. If you’re worried about falling behind, it can be helpful to include the minimum payment amount as a cornerstone of your overall monthly budget. You will avoid guessing where this money will come from and you will be able to pay off your debt on a consistent basis.
2. Track your spending
Reviewing your spending on a weekly or monthly basis can help you stay on budget. It also helps identify patterns and behaviors such as overspending in a specific area, allowing you to adjust your spending in the future.
3. Configure automatic payment
Paying your bills on time will help improve your credit score. Missing a payment will likely cause the interest rate to rise, negating the benefits of debt consolidation – and you want to prevent that from happening. You can set up automatic payment to transfer the loan repayment amount each month (the ideal time for this transfer would be right after you receive your income) and this consistent habit can help you get your debt under control.
4. Pay more than the minimum payment
If that’s an option for you, paying more than the minimum payment owed on your loan will help you pay off debt faster and save money on interest charges in the long run. Even if it’s not within your financial means to do it every month, all the money put on your loan beyond the minimum payment will benefit you.