Obtain a debt consolidation loan If you have bad credit, you may need to shop around, but there are options including loans from credit unions and online lenders.
Some lenders cater to borrowers with bad credit (a credit score below 630 FICO) and consider factors other than the score, such as education, income, and work history.
A debt consolidation loan should have an interest rate lower than the combined rate of your current debts and allow you to pay off the debt faster. Here is how to get a debt consolidation loan with bad credit.
Check your credit report
Are errors on your credit report the reason your score is low? Check for errors such as bad accounts, incorrectly reported payments, or inaccurate credit limits.
Until April 2022, you can check your credit report weekly for free at each of the three major credit bureaus – Experian, Equifax, and TransUnion – using AnnualCreditReport.com.
Even a small bump in your credit score can increase your chances of qualifying for a debt consolidation loan. Going from a bad credit score to a fair one (a FICO score of 630 to 689) could also lead to a more affordable loan with a lower interest rate.
Improve your debt-to-income ratio
If you don’t need to consolidate your debt right away, consider ways to increase your income and pay off small debts. It improves your debt to income ratio, which lenders use to assess your ability to repay a loan. The lower the DTI ratio, the more likely a lender is to approve your loan application.
Add a co-signer
Some lenders allow co-signers, which can help you qualify for a loan and get a lower rate. As a general rule, the credit score of the co-signer must meet or exceed the minimum requirements of the lender.
Compare the prices
Compare the interest rates and terms of several lenders to get a loan with repayments that match your budget. You can prequalified with most online lenders and see the estimated rates. It involves a smooth credit check, which doesn’t hurt your credit score.
Buy user-friendly features like direct payment to creditors, which means the lender sends the loan funds to your creditors, simplifying the process and eliminating any temptation to use the money for something else.
Where To Get A Debt Consolidation Loan For Bad Credit
|
4.0 NerdWallet Rating |
|||
|
4.0 NerdWallet Rating |
|||
|
4.0 NerdWallet Rating |
|||
|
4.0 NerdWallet Rating |
|||
|
4.5 NerdWallet Rating |
|||
|
5.0 NerdWallet Rating |
|||
|
4.5 NerdWallet Rating |
Credit unions
Credit unions are nonprofit financial organizations that can offer more flexible terms and lower rates than online lenders.
Federal credit unions cap annual percentage rates on personal loans at 18%.
Credit unions generally do not allow you to pre-qualify for a loan; the application requires a serious credit check, which can temporarily hurt your credit score and make shopping more difficult.
You also need to become a member of the credit union to apply for a loan, which can mean living or working nearby and paying a small membership fee.
Online lenders
Online lenders provide fast financing, as you can often complete the entire loan process online and get financing within days.
Online lenders can charge higher rates for bad credit borrowers than credit unions. In 2020, borrowers with bad credit (less than 630 FICO) qualified for an estimated average APR of 28.7%, according to a NerdWallet survey.
Online lenders can also charge assembly costs that cover the cost of processing your loan. The fees are usually deducted from the loan proceeds, so you may need to apply for a larger loan in order to get the full amount you need.
Reached is one of the best lenders online for bad credit loan. It accepts applications from borrowers with bad credit, and if you use the loan to pay off credit card debt, Upstart will send the funds directly to your credit card issuers.
To improve also considers bad credit applicants. If you get a debt consolidation loan and Upgrade sends the funds directly to creditors, you may qualify for an additional rate reduction (ranging from 1% to 3%).
Alternatives to debt consolidation loan
If debt consolidation loans don’t work for you, here are some possible alternatives.
Debt Snowball Method
The debt snowball method uses early earnings to keep you on track to free yourself from debt. In this method, debts are classified from the smallest balance to the largest. Then you prioritize paying off the smaller debts, even if other debts have higher interest rates.
Once the smaller debt is paid off, put the monthly payment for that debt on your next smaller balance until it is paid off. Continue to defer payments on each debt until you are debt free.
Debt management plan
A debt management plan from a nonprofit credit counseling agency can help you lower your interest rate and pay off your debt faster. This is an option if you have credit card debt and can stick to a payment plan for several years without using credit cards.
Bankruptcy
Paying off your debts in bankruptcy may be an option if you are overwhelmed with debt and it will take you five years or more to pay it off through consolidation. Bankruptcy wipes out most types of unsecured debt, including credit cards and medical bills.
While your credit score may initially suffer, it should start to recover within months of filing for bankruptcy.
