A debt consolidation loan is a great option for people who want to pay off their debts and achieve financial freedom. However, if you have poor credit, will this still be a viable option for you? This article will provide options based on experts’ opinions.
Let us start with a short discussion about Debt Consolidation Loans.
A Debt Consolidation Loan is a personal loan that you can use to pay off several debts, such as student loans and credit cards and you repay back the loan with one single monthly payment. These loans are usually fixed rate loans, with a repayment term of up to 60 months (5 years).
One of the notable benefits of a debt consolidation loan is that you can pay off your high interest credit card balances, payday loans and other debts with a low interest loan, thus making it easier for you to improve your financial situation and get out of debt quicker and in a more affordable way.
What if you have bad or poor credit? If your credit score is less than 660, you may find difficulty securing a personal loan for debt consolidation. If you however qualify for one, you must be aware that the interest rates will be high. If your current average interest rate for all your credit cards and other loans are 25%, and you qualify for a debt consolidation personal loan with an interest rate of 30%, then this would really not be the option for you.
It is recommended that you check with your credit union. If you have been a member for a long time, you can tap this resource to borrow money to pay off your debts even if you have a poor credit.
Here is a quick overview of the pros and cons of debt consolidation:
- Quick and easy application
- Opportunity to pay off high interest loans with a new, lower interest loan
- In the event of payment default, a debt consolidation personal loan can be discharged in a declaration of bankruptcy
- Less fees compared to home equity loans
- A good credit score is a requirement to secure a loan
- Shorter repayment terms. This means higher monthly payments
- HIgher interest rates compared to home equity loans
Now that you have an idea that debt consolidation personal loans usually cater to people with good credit, let us now discuss the alternative ways of debt consolidation with bad credit.
Listed below are seven (7) possible ways to consolidate debt even if you have a low credit score, and each will be discussed including its pros and cons.
- Debt Management Plan
- Home Equity Loan
- Home Equity Line of Credit (HELOC)
- Cash out Refinance
- Balance Transfer
- Debt Settlement
- Filing of Bankruptcy
Are you OK removing monthly interest payments?
#1 Debt Management Plan
With a debt management plan, you are going to be working with a consolidation company and/or credit counselor who will negotiate with creditors on your behalf for lower interest rates. They will set up a repayment plan. All your credit cards will be closed, which would be a good thing, so you cannot add more debt. You will be paying one fixed monthly amount to the consolidation company who will distribute the payment to your different creditors.
One benefit of this option is that credit scores have no bearing when applying. However, all your accounts will show that you are enrolled in the program and may cause some negative marks on your credit report. You will not be able to open or apply for new credit until after you are done with the program.
You must understand that the consolidation companies charge a monthly fee for their service.
- Accepts borrowers with poor credit
- Chance of having lower interest rates
- One monthly repayment amount
- You get charged a monthly service fee
- Negative impact on credit report
- You cannot open a new line of credit until after you are done with the program
#2 and #3 Home Equity Loans and Home Equity Line of Credit (HELOC)
This is an option for you if you own your home and have built up enough equity in it. With Home Equity loans, you borrow money against this equity. This is sometimes called a “second mortgage.” Interest rates are lower with longer repayment periods. A Home Equity Line of Credit (HELOC), on the other hand, allows you to borrow (withdraw) against your home equity, repay, and borrow again when the need arises. With home equity loans, you receive the money as a “lump sum” which will be paid back during a certain period of time, with fixed interest rates. HELOC however, works like a revolving line of credit, very similar to a credit card, but with variable interest rates.
A home equity loan or HELOC offers low interest rates, however, you must have a FICO score of 660 or higher.
- Low interest rates
- Interest paid may be tax deductible
- Longer repayment terms of up to 7 years
- Opportunity to pay off high interest debt with a low interest loan
- Low monthly payments
- Secured debt (you use your home equity as a collateral for the loan)
- Should you default on your payments, your home will be at risk for foreclosure
- Not eligible for filing of bankruptcy
#4 Cash out Refinance
This option is similar to home equity loans. This works by having a lender refinance your primary mortgage and offer you up to 80% of the value of your home in cash. You can then use this money to pay off several smaller but higher interest debts. You will now only have one single monthly payment to one lender.
A benefit of this option is the lower credit score requirement. FICO scores as low as 620 may qualify for this type of loan.
- You may qualify for a loan even if your credit score is as low as 620
- Low interest rates
- There is a possible chance for interest payments to be tax deductible
- Refinancing may get you a lower interest rate on your original mortgage
- There are upfront fees
- Not eligible for filing for bankruptcy
- You risk losing your home if your default on your payments
#5 Credit Card Balance Transfer
This options involves moving your high interest credit card balances into a new credit card with a lower interest rate. There are banks that even offer a 0% interest introductory period of up to 24 months for balance transfers. This introductory period at 0% interest will allow you to significantly pay down your debt. If you qualify for the 0% interest introductory period, you have to make sure that you repay your entire balance before this period expires. You have to understand that any balance left after the introductory period will be subjected to regular interest rates.
To qualify for this option, you are required to have at least an average credit score. If you have bad credit, you must look at other options.
- Opportunity to move high interest debt to a new, low or no interest card
- Helps pay off debt faster
- Opportunity to qualify for a 0% interest introductory period of up to 24 months.
- Requires average or good credit history to qualify for a low or no interest rate introductory period
- Any balance left over after the introductory period will be subjected to the regular interest rates
- There is a one time transfer fee
Do you want more money at the end of each month?
#6 Debt Settlement
Debt settlement is a process wherein your debt is charged off. You need the assistance of a debt settlement company to secure a settlement with your creditors. They will negotiate to bring down the debt to 40% to 60% of your original balance. All your accounts will be forwarded to collections.
Repayment must be the full amount or you can pay monthly up to 48 months. Your creditors may sue you if they have to wait for a long time to get their money back.
With debt settlement, you may only need to pay a portion of the original amount you owe, but you need to understand that you will create a big impact on your credit score. You will also be charged a fee by the debt settlement company. This may be as much as 15% of your original balance.
- Credit score is irrelevant if you choose to go this route
- You only pay back a portion of your total balance
- No interest
- You have the option to pay the balance in full or pay it in installments for up to 48 months
- Your credit score will drop significantly
- It will take years for your credit to recover from a debt settlement
- High fees charged by debt settlement companies
- You cannot qualify for new lines of credit
- Possibility of creditors filing a lawsuit against you
The last and least popular option to free yourself of debt is Bankruptcy. You may qualify for this option if you are in a serious financial dilemma with no means to meet your monthly repayments. Bankruptcy will surely cause your credit score to plummet and this mark will remain on your credit report for seven (7) years.
Your debts will be discharged if you qualify for a Chapter 7 Bankruptcy. If however, you fail to quality for a Chapter 7 Bankruptcy, you may be forced into a Chapter 13 Bankruptcy where you will have to adhere to a court mandated repayment plan. In both programs, you will need to speak with an attorney to represent you.
- Debts may be discharged
- No more collection calls and letters
- Debt is forgiven if you qualify for Chapter 7 Bankruptcy
- Significant drop in credit score
- Not qualified to open new lines of credit or loans for quite a period of years
- Student loans cannot be included in Bankruptcy
- Chapter 13 Bankruptcy will require you to pay off all your debts through a court mandated repayment plan.
Lenders that cater to consumers with bad credit
Debt consolidation loans are not easy to secure if you have bad credit. Most lenders would require an “average” credit score of 620 to 640. However, if you spend time doing your research, you will find some lenders that accept borrowers with credit scores as low as 580. Advant is one of those lenders that you can check out.
Debt consolidation loans with bad credit will always come with high interest rates. Do your math and find out if you will be actually saving any money in interest if you proceed with a debt consolidation loan.
Be in the know.
You are determined to work your way to being debt-free. Follow these simple steps – Weigh out all your options; shop around for lenders who would provide the best offer; always read the fine print; stay away from companies that charge upfront fees and other charges; and be vigilant to spot and avoid debt consolidation scams.