How To Qualify For A Debt Consolidation Loan If You Have Bad Credit

High-interest debt in particular can easily feel overwhelmed. When you have debts from multiple lenders. To stay afloat, you can make monthly payments that only cover the interest and make little progress in paying off the principal.

But there is a way forward. Debt consolidation is a strategy that combines multiple debts into a single payment at a lower interest rate, which can help you get out of debt faster. “If you have high-interest debt in multiple accounts, consolidation is the best option,” said Michael Foguth, founder of Foguth Financial Group, a Detroit-based financial planning firm.

Pro tip

If you want to take full advantage of debt consolidation loans, you should shop around.

One option is a debt consolidation loan, which is a type of personal loan that is given to pay off debts. You then make payments on this loan in lieu of multiple creditors. However, in order to get the best loan rates, you must have a good credit rating.

Credit alternatives to debt consolidation

A debt consolidation loan can be the best solution to manage multiple high interest debts. However, this option is not available to everyone, especially if you have poor credit. If you have bad credit, you can work on improving your credit before consolidating your debt. There are other alternatives to a debt consolidation loan.

1. Negotiate with lenders

One way is to contact your lender and negotiate to lower the interest you pay on each debt. This may sound like a far-fetched scenario, but if you have a good repayment history, lenders will be more willing to work with you to keep you.

2. Credit counseling

You can usually find free or inexpensive credit counseling services from a nonprofit organization. The focus is on education and debt management skills building. Credit counseling can also help break bad debt habits and instead lay a foundation of financially sound behavior to prevent future debt scenarios. The National Foundation for Credit Counseling is a great place to start your search.

3. Bankruptcy

If your debts are overwhelming, you are struggling to keep up with your bills, and finding other options to consolidate, negotiate, or pay off debts with lenders doesn’t work, you can consider bankruptcy as a last resort. Bankruptcy is considered an extreme measure and a last resort as it will stay on your files for up to 7 or 10 years depending on the type of bankruptcy you are filing.

How to Obtain a Debt Consolidation Loan With Bad Credit

According to Foguth, a credit rating of 720 or better is preferred for competitive rates and terms on a debt consolidation loan. 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 Experian credit bureau, which makes it harder to qualify for this type of loan. Since the goal is a lower interest rate, you want to increase your chances of getting good credit terms.

Applying for a loan when you are sure that you will be approved is the ideal situation as declining a loan is likely to have a negative impact on your credit score.

Here are a few steps you can take to position yourself to get approved for debt consolidation loans.

1. Check your credit history and check your credit report

You can have a good idea of ​​your creditworthiness by checking your credit history and checking your credit report. To obtain a free copy of your credit report, visit Doing this in advance will avoid surprises when it is time to apply for a loan. When you review your credit report, identify any elements that are adversely affecting your creditworthiness, such as: B. Failure. You can dispute discrepancies by contacting the reporting office with the relevant documents.

2. Pay your debts on time

Financial institutions want to lend to customers with good payment habits. Paying your bills on time and catching up on debt will make you a more attractive borrower. If you 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, you shouldn’t have more than $ 400 on that card, Foguth said. This suggestion applies to all of your lines of credit. One tactic is to work on keeping your debt ratio below 40% before applying for a debt consolidation loan. Also, avoid the temptation to open a new credit card. It is not advisable to apply for a new loan if you are planning to consolidate your loans as it is likely to have a negative impact on your credit score.

4. Get a co-signer

If you have a family member or friend with good credit who is ready to co-sign a debt consolidation loan, this is an option to consider. Adding their name to the application will take advantage of their good credit rating. There is one significant drawback, however. If you don’t pay your loan on time every month, your creditworthiness will suffer. Make sure your family member understands what is at stake before you co-sign, and you should be ready to commit to paying your bills on time by the end of the loan.

Where Can I Get a Debt Consolidation Loan With Bad Credit?

When you are ready to apply for debt consolidation loans, it pays to be prepared. You’ll need to provide information about 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 look around to find the lowest interest rate and the best terms for your situation. “Don’t be satisfied with the first offer you get,” said Foguth. “If you have average to good credit, take the driver’s seat; get an advantage. If you have poor credit, you should consider improving your credit before applying for a debt consolidation loan. “

1. Brick and mortar locations

Going to multiple physical locations to purchase a loan can be time consuming. However, a personal examination of your options will protect you from your information being passed on to other institutions. If you have a good relationship with your current bank, this is a good place to start. You can then visit other locations for more deals before making a decision.

2. Online goals

Shopping online for a loan is convenient. It gives you a larger pool of institutions to consider for your debt consolidation loan and can sometimes offer more advantageous rates. However, this method carries the risk of your information being disclosed to other companies that are beyond your control. “The internet is great for shopping, but companies will sell your information. As a result, you will receive multiple calls. If that’s okay with you, it may be the best option for you, ”Foguth said.

How To Manage The Debt Consolidation

Once your debt consolidation loan is approved, your debts will be under an institution. This should make it easier to keep up with your bills, but you still need to take proactive steps to manage your loan.

1. Create a budget

In order to use debt consolidation to pay off your debts, you have a great obligation: Pay on time and in full each month. If you are concerned about falling behind, it can be helpful to include the minimum payment amount as the cornerstone of your total monthly budget. You avoid the guessing game of where the money is coming from and you can consistently pay off your debts.

2. Track your expenses

A weekly or monthly review of your expenses can help you keep track of your budget. It also helps identify patterns and behaviors such as overspending in a particular area so that you can adjust your spending in the future.

3. Set up autopay

Paying your bills on time can improve your credit score. Missing payments will likely result in an increased interest rate that would negate the benefit of debt consolidation – and you want to avoid that. You can set up auto payout to transfer the loan payout amount each month (an ideal time to do this would be as soon as you receive your income) and this consistent habit can help you keep your debt under control.

4. Pay more than the minimum payment

If you can, paying more than the minimum payment required on your loan can help you settle debt faster and save money on interest charges in the long run. Even if it is not within your financial ability to do this every month, any money that is spent on your loan beyond the minimum payment will benefit you.