Unpaid debt is always a liability that everyone wants to get rid of as soon as possible. The truth is, if we are low in credit, then clearing debt becomes more difficult. Furthermore, unpaid debts are like red marks in our credit history. To overcome this, applying for a debt consolidation loan might be a good option. But, they too have disadvantages.
What is Debt Consolidation Loans?
A debt consolidation loan is a loan which is taken to pay-off overlying debts or bad credits like, pending credit card bills, student loan, etc. Once approved, an individual can pay the existing debts using the loan amount sanctioned. Just like any other loan, an individual needs to clear the debt consolidation loan amount along with interest. While applying for a debt consolidation loan, you should check various factors like interest rate applied, tenure, other costs associated like late payment charges, etc.
Debt Consolidation Loans for Bad Credit
If you are having bad credit and you want to apply for a debt consolidation loan, having a well-planned approach would be quite helpful.
Check your credit scores:
Before applying for any loan, checking your credit score is a must. It will not only give you an insight into your credit history but would also help you in determining your eligibility for the loan.
Compare the terms offered by different loan providers
Nowadays, there are many financial organizations which deal in a debt consolidation loan. You can use this for your benefit. Get a better rate of interest and compare it with other terms offered by various lenders. Analyze all the available options and select a lender who gives you the loan at the interest rate that suits your current financial condition.
Explore all the options
With a bad credit score, your options for getting a debt consolidation loan might get restricted. If the terms of the loan offered by known financial institutions like banks, etc. don’t suit you, then it’s better to explore other options. These include online lenders and credit unions.
Look for a co-signer
If you are finding it difficult to get a loan based on your credit score, then consider the option of applying with a co-signer. A co-signer can be anyone ready to share the responsibility of the loan with you. Applying for a loan with a co-signer (with a high credit score) would increase the chances of getting a loan that too with a lower rate of interest.
Credit score required for the eligibility of a debt consolidation loan?
Our credit score is considered not only while applying for loans or credit cards, but many employers go for a “job credit check” of their potential employees.
Mostly, the credit score of 579 and below is considered bad. Chances of getting a bad credit loan are very less if your credit score falls in this range. On the other hand, if your credit score falls in the range of 580-739, the chances of loan getting approved are quite high. In case your credit score is 800 or above, then you might not have anything to worry about. This range is considered as excellent as per most of the credit ranking models.
In case you want to clear your debts, but you are not satisfied with the terms offered for a debt consolidation loan, or your loan does not get approved. Don’t lose hope. Debt Consolidation is not the sole solution for resolving your debt issues. Numerous alternatives are available in the market.
– Debt Management Plan (DMP)
DMP is used to clear credit card related debts. This can be availed from credit card debt consolidation companies. Under this plan, all your existing credit card accounts get closed, and the debt against all your existing credit cards is consolidated. The credit card debt consolidated company selected by you will negotiate repayment terms with your credit card companies. Based on these negotiations, they will form a repayment plan for you. Now, you need to make 1 fixed monthly payment to your consolidation company, and they will disperse that amount to your creditors.
You can apply for DMP, irrespective of your credit score. Also, under DMP, you have to make only 1 payment per month, which would be much easier as compared to paying to all the credit card companies separately. However, you would have to pay a fee to your consolidation company for their services. Under DMP, you won’t be eligible for applying for any new credit till you clear all your dues as per your DMP.
– Home Equity Loan
Home Equity or Second mortgage is another way to clear your consolidated debts. For this, you need to have equity in your residence. You can borrow money against your home equity. Home equity loans have a lower rate of interest. The term of this loan is around 5-7 years.
Timely payments are essential in the case of home equity loans. If you fail to clear the loan, you might end up losing your house.a
– Cash-out Refinance
Cash-Out Refinance works on the same basic principle as a home equity loan. However, in this, the lender refinances your existing house loan and lends you money in cash against the house equity. You can avail cash-out refinance even if you have a poor credit score.
– Balance Transfer
Another way of clearing bad credits is by transferring balances of high-interest credit card account to one with low or no interest rates. This way, you can save yourself from paying the interest amount.
This debt settlement option is not applicable in case of poor or bad credit score.
– Debt Settlement
Under debt settlement, the company selected by you negotiates with your creditors. The debt amount is generally reduced by 40%-60% of the original amount. You might have to pay the balance amount in one payment or installments stretched over 1-2 years.
Debt settlement is one of the cheapest ways to settle debts as you have to pay only a part of the total debt. However, the fees charged by debt settlement companies is very high. In addition to this, debt settlement hit credit rating very severely, and it will take years to improve your score.
If your multiple debts are creating issues for you. Consolidating them is always a better option. But, be sure about how you want to clear this consolidated amount. Select an option that not only in debt settlement but also has a minimum effect on your credit score.