A debt consolidation loan is an option for individuals struggling financially. Maybe you have a fair credit score and could qualify for a reasonable debt consolidation loan amount to work towards paying off your debt. If you have a bad credit score, it can be difficult to qualify for loan funds for debt consolidation. Even though we don’t offer debt consolidation options at the O’Bryan Law Offices, it’s important to know the available debt relief options. Below we explain what a debt consolidation loan is and how you can qualify for one with bad credit.
What Is a Debt Consolidation Loan?
Debt consolidation in Kentucky is a way to manage your debt by rolling all of your debts into one account. The most common type of debt consolidation is a debt consolidation loan, which is a personal loan used to pay off creditors.
A debt consolidation loan can make getting out of debt easier since you only have one account to manage that may have a lower interest rate. You can utilize a debt consolidation loan to pay off credit card debt, payday loans, or other loan payments. However, qualifying for a debt consolidation loan with bad credit scores can be challenging.
How Do I Qualify for a Debt Consolidation Loan?
The requirements for qualifying for debt consolidation loans will vary depending on the lender. They are responsible for creating the conditions borrowers must meet to be considered for a debt consolidation loan.
The most common requirements for debt consolidation loans are:
- A minimum credit score around the middle 600s
- 18 years or older
- A United States citizen or permanent resident
- No bankruptcy or foreclosure pending
- A debt-to-income ratio that is no higher than 45%
You may find a lender that will still approve your loan application if your credit score doesn’t meet the requirements and your debt-to-income ratio is too high. If this happens, you may end up paying more in fees and interest. If this debt consolidation loan has high interest and fees, you may want to evaluate whether the personal loan will save you money or cost you more in the long run.
4 Tips for Getting a Debt Consolidation Loan with Bad Credit
If a debt consolidation loan could be the solution to your debt problems, consider following these steps:
Comparison Shop
Accepting the first debt consolidation loan offer that you find is rarely a good idea. It’s recommended to research offers from multiple lenders to find the best debt consolidation loan. When looking for a loan, it’s important to consider the repayment terms, fees, and loan amounts. You can shop for loans with online lenders, credit unions, and local and national banks. Comparing debt consolidation loans might be time-consuming, but it could save money.
Keep Up with Your Credit Score
Your credit score is a big determining factor when it comes to the conditions of your loan. A low credit score will usually result in higher interest rates. If you’re unsure about your credit score, there are free tools available at banks to help you monitor your credit score. After determining your credit score, you can look for specific lenders offering debt consolidation loans for bad credit. Debt consolidation lenders’ credit score requirements are usually listed on their websites.
Wait Until You Improve Your Credit Score
If you’re still unable to find lenders that will offer personal loans for debt consolidation, you may want to wait and improve your credit score. Maybe start making on-time monthly payments towards your debts. Payments on credit card balances can help improve your credit score. You may also want to evaluate any nonessential expenses and allocate that money toward debt payments.
While you’re working towards improving your credit score, it’s recommended that you get copies of your three credit reports, TransUnion, Equifax, and Experian. Once you receive copies of your credit reports, look over them and ensure there are no errors that could be impacting your credit score. If you find an issue, you can dispute it with the credit reporting agency.
Consider Other Options
A secured loan could be an option if you’re struggling to meet the qualifications for a debt consolidation loan. Car loans and mortgages are the most common secured loans. The lender will require collateral with secured loans, like your home or car. Unsecured loans like debt consolidation loans do not require collateral. The lender can seize that collateral if you default on your secured loan. Since secured loans require collateral, they can be easier to qualify for.
Where Can You Get a Debt Consolidation Loan?
Searching for lenders that offer the best debt consolidation loans can take time to decide where to begin. We’ve listed several places where you can look for lenders.
Banks and Credit Unions
You can talk to a loan officer at your personal local credit union or bank to see if you can qualify for a personal loan. The loan officer will be able to tell you whether you can qualify, the loan amount, and the terms and rates. You’re not necessarily denied if you have a low credit score. Banks and credit unions will also evaluate your credit history that you’ve had with them over the years.
Lenders from Online
Online lenders are usually more flexible when offering debt consolidation loans for bad credit. When using an online lender, receiving funds can be easier, applying is quicker with less paperwork, and comparing different lenders’ rates won’t affect your credit score. It’s common for online lenders to charge higher rates with debt consolidation loans for bad credit. Look for origination fees that can lower your loan proceeds and increase your financing costs. Before choosing an online lender, determine if they’re a direct lender. Third-party lenders can charge additional costs and fees, and have higher interest rates.
Alternatives to Consolidating Debt with Bad Credit
There are other options to consider if you cannot qualify for a debt consolidation loan with a lower interest rate.
DIY
Before involving third parties, you can try to adjust your finances to pay off your debt. Evaluate your budget by comparing what you take home from your paycheck to your spending. This way, you can eliminate unnecessary costs that help you free up money to use toward debt payments.
Renegotiate with your lenders on the terms of your debt. Depending on your lender, they could be open to lowering your monthly payment or interest rate.
Adjust your payment date to help keep track of your payments. This isn’t a debt consolidation option, but having the same payment deadline for multiple debts could help you stay on top of your payments. Undergoing debt counseling may be very beneficial during this time.
Debt Management Plans
Debt management plans, or DMPs, are programs where you make one monthly payment to a credit counseling agency that pays for multiple bills. The credit counseling agency then pays your creditors at a lower interest rate than they have negotiated. A debt management plan can usually take up to five years to finish. Your credit score will reflect that you are involved in a debt management plan. While this does not affect credit scores, getting new lines of credit can be challenging.
Home Equity Loan
A home equity loan is an alternative to a debt consolidation loan if you have significant equity in your home. Even though a home equity loan isn’t the same as a debt consolidation loan, it can help you qualify for a lower interest rate.
Home equity loans are also referred to as second mortgages. These fixed-rate loans allow homeowners to borrow against their home’s equity to help consolidate debt. Your home acts as collateral.
A home equity line of credit, HELOC, is another home equity option that uses your home as collateral. Instead of borrowing money like a home equity loan, the HELOC is similar to a credit card with a fluctuating interest rate.
Cash-out refinances will replace your current mortgage with a larger balance than you owe on your home. Using the difference between the two balances, you can consolidate debt and work on making payments.
It’s important to note that any home equity loan, HELOC, or cash-out refinance options can result in losing your home if you fail to make payments.
Alternative Options for Those Who Can’t Qualify For a Personal Loan
If the home equity or debt management plan options don’t work, the options below may be the only way to manage your debt and get financial relief.
- Credit counseling agencies can negotiate with your creditors to help you improve your credit score. Your credit counselor can create a debt management plan to help you with your debt. Credit bureaus typically have contracts with lenders to receive lower interest rates than you could get on your own.
- Debt settlements are an option if you can negotiate with your lender to make lower payments to pay off multiple debts. You can discuss this with your lender or use a debt settlement company or attorney to do so for you. Regardless of who does the negotiations, your credit score can be affected. For the debt settlement company to negotiate with your creditors, you must usually pay toward your account with your company, which could affect your other monthly payments. This can result in you defaulting on your debts. Defaulting can cause more damage to an already bad credit score that can be difficult to repair. After the debt has been paid, the default can stay on your credit report for seven years.
Chapter 7 Bankruptcy
If you can’t get a debt consolidation loan with bad credit and none of the other options we’ve mentioned will work, bankruptcy may be the only way out of your financial situation. A Chapter 7 bankruptcy in Kentucky is also known as liquidation bankruptcy. It is a common form of bankruptcy for individuals with enormous debt.
During a Chapter 7 bankruptcy, you will be assigned a bankruptcy trustee responsible for liquidating any nonexempt assets to pay your debts. Exempt property is anything essential to maintain basic living standards, like clothing, furniture, and a vehicle. The trustee will first use the money from selling your assets to pay your unsecured debts, like credit card debt. Unsecured debts include child support and anything tax related. Once the unsecured debts have been paid, the trustee will pay off your secured debts, which are any debts that involve collateral like your home.
Any remaining, nonpriority unsecured debts will be paid with the remaining balance left from the liquidation. Once all of the money has been used from the liquidation process, the remaining debt will be discharged. Your Chapter 7 bankruptcy will remain on your credit report for up to ten years.
Chapter 13 Bankruptcy
Filing for a Chapter 13 bankruptcy in Kentucky is another option if you cannot qualify for a debt consolidation loan or Chapter 7 bankruptcy. Known as the wage earners plan, a Chapter 13 bankruptcy is for individuals or couples with a steady income too high to qualify for a Chapter 7.
Chapter 13 differs from Chapter 7 in that Chapter 13 bankruptcy does not liquidate your assets to pay off debts but reorganizes your debts. To pay off the debts in Chapter 13, your bankruptcy trustee will combine your debts into one monthly payment amount. Missing a monthly payment during your repayment plan can be detrimental to your bankruptcy and result in your case being dismissed. Chapter 13 bankruptcies can last three to five years and remain on your credit report for seven years.
Is Debt Consolidation a Good Idea?
Debt consolidation can be good for individuals with a good credit score and looking for debt relief. When you have a good credit score, more lending options are available for debt consolidation loans than when you have a bad credit score. When trying to get a debt consolidation loan with bad credit, you risk a higher interest rate.
Before applying for a debt consolidation loan, it’s essential to evaluate your existing debt amount to what your new debt amount could potentially be with a debt consolidation loan.
To determine whether a debt consolidation loan is the answer to relieving your debt, follow the steps below.
- Make a list of any debts you currently owe, along with creditors, balances owed, monthly payments, and interest rates. Determine which debts you want to consolidate and what debt consolidation loan terms would work best for you. Once you map this out, it can help you when looking for debt consolidation loans that only match your goals.
- Evaluate your financial behavior by determining what decisions you’re making that are contributing to your debt. If you aren’t willing to change your current finances, a debt consolidation loan may make your debt worse than before.
- Check your credit score and ensure there are no errors that have been making your credit score low. You can also look at your credit report to determine if you need to pay down any additional debt that can help you raise your credit score so that you have more options when applying for a debt consolidation loan.
- Before applying, check with your bank or other lenders to see what terms and rates you could qualify for when applying for personal loans for debt consolidation. They should only perform a soft credit check that won’t negatively impact your credit score. A preapproval for a debt consolidation loan does not guarantee those terms and fees, but it can help you decide if it’s the route you want to take.
Are You Struggling with Debt and Looking for a Way Out?
A debt consolidation loan may not be the answer if you’re struggling with debt. It can be difficult to qualify for a debt consolidation loan with bad credit, and it can also add more debt to your already fragile finances. Often lenders can require additional fees and high-interest rates, especially if you have bad credit.
When you file for Chapter 7 or Chapter 13 bankruptcy, you can work on rebuilding your credit while paying off your debts. In addition, you can rest easy knowing that once you file for bankruptcy, the creditors can no longer attempt to collect your debts, so you can focus on rebuilding your finances. If you’re looking for a solution to your financial troubles, contact the experienced bankruptcy attorneys at the O’Bryan Law Offices. Schedule a free consultation and call our law office at 502-339-0222.
