If you’d love a debt consolidation loan to get rid of high-interest debt, don’t give up on the idea just because your credit is poor. There are steps you can take to both improve your chances and get you a better interest rate.
What Is Debt Consolidation?
It’s the process of taking out a new loan to erase other obligations. Multiple debts are combined into a single, larger loan, usually with more favorable payoff terms including a lower interest rate, lower monthly payment, or both.
Borrowers with a FICO credit score of less than 640, however, will likely need to work harder to qualify for a loan. The fact is, finding a debt consolidation loan with bad credit is doable, but you’ll need to put in the effort.
What Can I Do To Help Myself?
Before looking for debt consolidation loan lenders for bad credit, try cleaning up your credit profile. After all, you want to see what creditors see when they look you up.
After getting a copy of your credit report, examine it to see exactly why your score is low. For instance, a lender will look askance at a past-due account, but you’ll have a better chance of qualifying if you see it first and do something about it.
Lenders also factor in your debt-to-income ratio — the percentage of your monthly income that goes toward payments. They usually like to see a ratio of below 50 percent, and the lower the better.
If you don’t need the loan immediately, try to pay down debt before you apply. If you need consolidation right away, consider adding a co-signer who has good credit and a strong income. Careful, though, since the person who agrees to help you out will be liable for the loan if you default.
You should also put together a repayment plan. Lenders report to credit bureaus both on-time and missed payments, so your ability to make your payments will determine the shape of your credit.
Furthermore, understanding a lender’s rates, terms, and extra fees will assure that you know exactly what you will owe each month and when you will owe it.
Still, something may come up and you may miss a payment or two. Because lenders don’t immediately alert delinquent payments to credit bureaus, make the payment as soon as possible to avoid a credit hit.
Sizing up offers from credit unions, banks, and online lenders can help you pinpoint the best rate and features for you.
There are lenders that cater to borrowers with low credit scores. Seek out reputable ones that cap their annual percentage rates (APRs) at 36 percent — about the highest rate a manageable loan can carry.
Many online lenders will also let you prequalify for a loan without hurting your credit score. This involves conducting a soft credit inquiry to estimate your likely terms. By contrast, many credit unions and banks require you to officially apply before any offer, prompting a hard check that can cause a temporary drop in your score.
Also, your local credit union or bank may be more amenable to working with you if a recent misunderstanding or long-ago issue has been a drag on your credit.
Note, too, that while an online lender may be convenient and have the most competitive rates, it’s still all about algorithms. Your local institution may be more apt to assess the borrower from a holistic point of view.
So, now that you know how to find a debt consolidation loan with bad credit, you are well on your way to a future of renewed financial stability.