One frustrating aspect of debt is that carrying it can start to take a toll on your credit score. This can happen in a number of different ways, like if your balances become overwhelming and you miss one or more payments. Another way rising debt can diminish your credit score is if it pushes your credit utilization ratio — the percentage of total available credit you’re using — upward, making it appear to lenders like your debt obligations are eating up too much of your credit limits.
Many borrowers find themselves in the position of wanting to consolidate their debts but unsure whether they can do so with less-than-optimal credit. Good news: Getting a debt consolidation loan with bad credit is possible these days, as there are a wide range of lenders offering loan products with an array of terms. The challenge, though, is finding a loan that will actually allow you to reap the benefits of consolidation — namely saving money on interest.
Here’s more on what you need to know about consolidating debts with a bad-credit loan.
Establish and Focus on Your Debt Consolidation Goals
It’s easy to get swept up in the quest to get approved for a loan. Hearing back from a bank or lender can feel like a victory in itself. Yet, it’s critical to remember that consolidation loans don’t automatically improve your financial situation; only the right loans do.
This is why defining your goals ahead of time can help navigate this process. A worthwhile debt consolidation loan can and should:
- Offer more consistent repayment terms than credit cards do.
- Bundle your current debts into a single convenient monthly payment.
- Reduce the amount of interest you end up paying on your debts.
To assess various debt consolidation options, you’ll need a clear idea of your starting point. How much do you currently owe? What interest rate are you paying on each account? How long would it take you to pay off your debts without consolidation? Answering these questions will help you compare consolidation options against your current strategy.
Tips for Getting a Consolidation Loan with Poor Credit
Anything you can do to bolster your credit score before applying will help. For starters, check your credit reports for errors that you can dispute in your favor. According to the Consumer Financial Protection Bureau, one in five people has an error on at least one of their credit reports.
Check out a range of lenders, from banks to online companies specializing in bad-credit loans. Bankrate advises comparing features like:
- Loan amounts
- Repayment terms
- Fees
Shopping around in this manner, while it does take additional time and effort, can end up helping you find the best possible terms available to you.
Another possibility is considering either a secured loan, or an unsecured loan with a cosigner. Each has its advantages and disadvantages to consider before agreeing. Secured loans require you to put up collateral, like your car or home. This can help you boost your chances of qualification or lower your interest rates but be aware your collateral is at risk if you default.
Using a cosigner means having someone legally vouch for you — or, in other words, basically “lend” you their credit score so you can get better terms. Both you and your cosigner are on the hook for the loan, so be extra sure you’re prepared to pay it back in full or you could risk ruining both your financial standings — not to mention your relationship.
Getting a debt consolidation loan with bad credit is a matter of optimizing your credit however much you can before applying, shopping around so you know all your options and considering measures like a secured loan or cosigner if need be.