If you have several different types of debt, getting a debt consolidation loan can make a lot of sense. If you have bad credit along with mounting debt, you may still be able to borrow, but getting there will take some doing. Here is what you need to know.
What Is Debt Consolidation?
With debt consolidation, you take out a loan to cover existing debts. You repay that loan with a single monthly outlay. No more payments to multiple creditors.
So long as you’re paying less interest on the loan than you are on your debts, you’re good to go. Consolidation interest rates have a broad range — between 5% and 36% — so you may be able to get a low payment.
Do I Qualify?
Can you do debt consolidation with bad credit? It’s possible. In general, lenders seek a credit score of between 580 and 620. It’s important to note in addition to your score, lenders often consider other factors such as your payment history and income. It also helps your loan consolidation chances if you’re open to having a co-signer or getting a secured loan.
Kinds Of Debts To Consolidate
Generally, eligible consolidated loans or credit lines must not be secured or attached to collateral. Common types of debt to consolidate include student loans, cell phone and utility bills, credit card balances, unsecured personal loans and personal lines of credit. Hospital and other medical bills, payday loans and some court judgments can be consolidated as well.
How To Get A Debt Consolidation Loan
Before looking for a loan, it’s best to check your credit report for errors that can diminish your score. It’s best to know where you stand before you apply for a loan. Be sure to pull reports from all three credit reporting agencies, since scores can vary.
It takes time to mend credit, however. In the near term your best bets may be to pay bills on time, limit hard inquiries on your credit reports, and keep any active accounts open.
Shop Around
Now that you know your credit score, you can begin shopping around for potential lenders. It’s a good idea to start with your own financial institution, especially if you have an established relationship.
Next, you can begin researching online lenders and other banks and credit unions, and compare loan terms, interest rates, and lender fees. Keep in mind that your potential lenders will run a hard credit check that can have a negative impact on your score. Getting a loan pre-qualification, however, requires a soft credit check, which does not affect your score.
Getting prequalified by multiple lenders can help you determine your odds of getting a loan. You can also compare rates and terms to find the best consolidation loan for your situation.
Consider A Secured Loan
Secured loans often have lower interest rates and may be easier to get because they are attached to collateral such as your home or vehicle. Tread carefully though: you don’t want to default and lose your possessions.
Get A Co-Signer
A co-signer who has good or excellent credit can possibly help offset your negative credit marks and get you better terms. But remember, if you get your friend to co-sign and you miss loan payments, your friend is on the hook for the balance.
Shore Up Your Debt-To-Income Ratio
If your poor credit score is blocking you from getting a debt consolidation loan, try to improve your debt-to-income ratio by paying off a few of your smaller debts.
So, can you do debt consolidation with bad credit? Possibly. Just take your time, if you can, and be strategic about the process.