You need to settle mounting debts, but you have poor credit. That makes it hard to qualify for a debt consolidation loan. However, you do have options if you put in the work. Those include personal loans, home equity products, and credit cards. Here are the top debt consolidation methods for bad credit, and how they might work for you.
Debt Consolidation Loan
You’re going to have to seriously shop, but you can find someone to work with you. Some lenders even specialize in borrowers with a credit score below 630. These creditors also consider factors such as employment history, income, and education.
But first, is a loan the best move? It could be, if it has a lower interest rate than the combined rate on your existing debts. That way, you could pay down debt faster. Try this tool to calculate whether a loan is in your best interest.
Get Your Credit Report In Shape
Check your credit report for errors such as incorrect amounts, credit limits, or missed payments. Correcting such errors before you apply for a loan might increase your score from, say, poor to fair. You can check your credit score for free annually at each of the three credit bureaus.
Another key factor in credit scoring is payment history. Using a debt consolidation loan can prospectively improve yours.
Shore Up Debt-To-Income
If you can hold off on consolidating debts immediately, think about strategies to raise your income and erase your smallest debts. Improving your debt-to-income ratio, which lenders use to assess your loan risk, is always a good idea.
Consider A Co-Signer
Another top debt consolidation for bad credit approach is securing a co-signer, someone who can help you qualify for a loan — and at a lower rate. Usually, the co-signer must meet or surpass the lender’s minimum requirement.
Shop Around
To get a loan with repayment terms you can afford, compare interest rates and terms from several lenders. You can prequalify online with most lenders and see rate estimates. This requires what’s known as a soft credit check, which doesn’t affect your credit score.
Credit Unions
To apply for a loan with a credit union, you must first become a member. This usually involves a small membership fee. While many credit unions don’t permit you to pre-qualify, they might have more flexible terms and better rates than online lenders. (include links for the credit union)
Online Lenders
With online lenders, the process is usually fast — funding may take less than a week — but rates can be higher than those at credit unions. According to a NerdWallet survey, the APR for online loans for bad credit is roughly between 16% and 35%. Such lenders may also require origination fees for loan processing. That fee is usually deducted from the loan proper, so you might have to get a bigger loan to assure you have the funding amount needed.
Home Equity Loan
If you have equity in your home, you may be able to use it for a home equity loan or credit line to erase high-interest debt. You may qualify for a lower interest rate since the loan is secured by your home.
Credit Card Balance Transfers
If you’re looking to pay off credit card debt, think about balance transfer options with an introductory 0% APR credit card.
So, now that you know the top debt consolidation methods for bad credit, you’re well on your way to relieving yourself of debt … and setting yourself on a new financial path.
