Have a lot of debt that you want to pay off?
A debt consolidation loan may be a great option for you.
But how do you get a debt consolidation loan with bad credit?
We asked the experts to find out the best types of loans for consolidating debt for people with poor credit.
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What are Debt Consolidation Loans
A debt consolidation loan is a personal loan that pays off multiple debts, such as credit cards and student loans. The loan is paid back with a single monthly payment at a fixed rate for a period of 24-60 months.
If you have debt with high interest rates you know that a large amount of your monthly payment goes towards interest. Making it difficult to get out of debt. Debt consolidation loans are a great way for people to get a low interest loan to pay off high-interest debt.
You will be able to pay your high interest credit cards, payday loans, and other types of debt. By paying off all of those high interest debts with a single low interest loan you can get out of debt much quicker and cheaper.
Debt Consolidation Loans for Bad Credit
If you have low average to bad credit (below 660 credit score) you may still qualify for a debt consolidation loan but the interest rate will be high. Rates can be as high as 30% in some cases defeating the purpose of a debt consolidation loan.
Many people choose to consolidate debt because of the high interest rates making it hard to pay down the principal balance. Getting a consolidation loan with a high rate just doesn’t make much sense. So, if you have bad credit what are your options for consolidating your debt?
Check with your Credit Union
Credit Unions are pillars of the community. Transactions are not always black and white, relationships play a big part in a credit union. If you have been with the same credit union for a long time the likelihood of getting approved for a debt consolidation loan with poor credit is increased.
Pros to Debt Consolidation Loans
- Pay off high interest debt with a lower interest loan
- If you fall behind on payment a personal loan can be discharged in a bankruptcy
- Quick and easy loan application
- Much lower fees than a home equity loan
Cons to Debt Consolidation Loans
- Requires good credit
- Shorter terms than home equity loans means higher payments
- Higher rates than home equity loans
7 Debt Consolidation Loan for Bad Credit Alternative Options
Debt consolidation loans for bad credit are either not possible, or come with high interest rates. You should know all of your options before doing anything.
There are other ways to get out of debt besides through a debt consolidation loan. Which is great news for people with bad credit who have trouble getting approved.
Debt Consolidation Loan Alternatives
- Debt Management Plan (DMP)
- Home Equity Loan
- Cash-out Refinance
- Balance Transfer
- Debt Settlement
Debt Management Plan (DMP)
A debt management plan, or DMP, is offered by credit card debt consolidation companies. Often referred to as non-profit credit counseling. What happens in a DMP is your cards will all be closed. The company you choose to work with will negotiate your interest rate down and set up a repayment plan. They do this with all of your accounts. You will pay one fixed monthly payment to the consolidation company that is then dispersed to your creditors, minus their fees.
One of the advantages of this debt relief program is that you don’t need perfect credit. In fact your credit score doesn’t matter at all, everyone is accepted. All of the accounts enrolled will show that you’re in a DMP on your credit report. You will not be able to get any new credit until you complete the program.
While a debt consolidation company is a great option to consolidate debt with bad credit. This is something you can do yourself. You will just have to call each creditor to close your account, explain your financial situation and negotiate the rate down and set up a monthly repayment plan.
Pros of Debt Management Plans
- Consolidate debt even with poor credit
- Lower your interest rates
- Have just one monthly payment
Cons of Debt Management Plans
- Comes with monthly fees
- You could set up a DMP on your own
- Black marks added to your report
- Unable to attain new credit while in he program
Home Equity Loans and HELOC
If you own your own home and have built up equity you can use that equity as collateral for a loan. A home equity loan is also called as a second mortgage. HELOC stands for a home equity line of credit and works like a credit card. Your home equity will be converted into cash.
A home equity loan will have lower rates than a debt consolidation program. However, these loans will require good credit history, usually at least a 660 FICO score or higher is required. But this is one of the cheaper debt relief options because it’s a low-interest loan. Many people use the money from a home equity loan to pay off credit card debt.
Pros of Home Equity/ HELOC Loans
- Lower rates than debt consolidation loans
- Long terms between 5-7 years
- Interest may be tax deductible
- Pay off high interest accounts with a low interest loan
- Longer repayment terms means low monthly payments
Cons of Home Equity/ HELOC Loans
- Turning unsecured debt into debt secured by your home
- If you fall behind on payments your home is at risk of foreclosure
- Credit cards debts are eligible for bankruptcy, home equity loans are not
A cash out refinance is similar in a way to a home equity loan. However, instead of having two mortgage payments with two lenders. You will have a single payment to one lender. A lender will refinance your primary mortgage plus give you up to 80% of the value of your home in cash.
One of the great benefits of a cash out refinance is that the credit requirements are lower than home equity loans. You may be able to qualify for a cash-out refinance with bad credit as low as 620.
Pros to a Cash-Out Refinance
- Low rates
- Can qualify with scores as low as 620
- Interest paid may be tax deductible
- May get a lower rate on your original mortgage
Cons to a Cash-Out Refinance
- High upfront costs
- Unsecured debt can be discharged in a bankruptcy, your home cannot
- If you fall behind on payments your home is at risk of foreclosure
Balance Transfer to a 0% Interest Card
There are several credit cards out there that offer a 0% initial interest rate between 12-24 months. You can transfer the balances of the high interest accounts to the no interest card. This will help you pay off the debts much faster and save a lot of money in interest.
To qualify for the balance transfer cards you typically need to have at least an average credit rating. If you have bad credit this may not be an option for you.
Pros of a Balance Transfer
- Move high interest debt to a low or no interest card
- Pay off debt faster and cheaper
- May qualify for 0% interest for a period of 12-24 months
Cons of a Balance Transfer
- Good credit needed for no or low interest rate
- After initial period rate will increase
- Most cards have a max of $10,000
Debt settlement is a process that requires the debt to be charged off. Obviously your credit score will take a significant hit. All of your accounts will be sent to collections. The debt settlement company will contact all of your creditors to negotiate a settlement, usually between 40%-60% of the original balance.
You will pay a monthly payment into an escrow account. Terms are either pay in full or stretched out over 12-48 months. If creditors have to wait too long they may sue you. Being in a debt relief program does not mean a creditor will not sue you.
Debt settlement may be one of the cheaper options because you only pay back a portion off your debt. However, debt settlement companies charge very high fees and your credit rating will tank. You can settle your credit card debt yourself. If you have a collection account you should call the creditor. Many creditors will offer a settlement if you make a lump sum payment. This way you can avoid the fees.
Paying off creditors will not help your credit score. The status of a collection account is irrelevant. Paid in full vs settlement on your credit report will not have any impact on your FICO score. This is a risky alternative to a debt consolidation loan because of the credit impact and the possibility of being sued.
Pros of Debt Settlement
- Pay back a portion of the amount you owe
- Pay no interest
- Payments can be stretched out for 48 months giving you a low payment
- Credit score is not a factor to qualify for the program
Cons of Debt Settlement
- Will significantly drop your credit score
- Your credit will take several years to recover
- Will not be able to qualify for new types of credit or loans
- High fees, Debt settlement companies charge up to 15% of your balance
- Could be sued by your creditors
Bankruptcy is usually a last resort to getting rid of debt. You will only be able to qualify if your in a serious financial hardship and can prove it. A bankruptcy will remain on your credit for a period of 7 years. This is the cheapest option because your debts are discharged in a chapter 7 bankruptcy. However, you will have to hire an attorney.
Obviously a bankruptcy will severely damage your credit rating. Your score will plummet initially, you can recover from a bankruptcy after a few years. If you do not qualify for chapter 7, you may be forced into a chapter 13 bankruptcy.
You will have to repay all of your debts and will be placed on a repayment plan. You should speak to a bankruptcy attorney if you feel this may be a good option for you.
Pros of filing bankruptcy
- Debts may be discharged
- Collection calls and letters stop
- Debt is forgiven in ch 7
Cons of filing bankruptcy
- Student loans cannot be included
- Your credit will take a significant drop
- New credit or loans will not be offered for several years
- Chapter 13 requires you to repay all of your debts
Debt Consolidation Lenders for Bad Credit
Getting a debt consolidation loan with bad credit is no easy task. Most debt consolidation lenders require at least a decent credit score of 620-640. There may be some lenders, such as Advant that are able to work with a 580 credit score.
A debt consolidation loan with bad credit may come with a high interest rate. You may not be saving that much money in interest which defeats the purpose of a debt consolidation loan. Know your options.
Know Your Options
There are many other ways to get rid your debt. Home equity loans and cash out refinances are a way to get a loan using your homes equity as collateral. Debt management and debt settlement programs are available to help reduce your debt or interest and provide a single payment. However, these programs come with high fees and will hurt your credit score in the process.
A balance transfer is a good way to move high interest debts onto a low interest credit card. You may need to have at least an average credit score to get approved, which makes a balance transfer unavailable to those with low credit scores.
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