A consolidation loan helps combine multiple high-interest accounts and obtain a fixed or lower interest rate. This is one way to make payments affordable, pay down excessive debt, and reestablish your credit history.
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How to Tell if You Have Bad Credit?
Having a low score affects your purchasing power and access to credit. People with poor credit find it difficult to get a job, rent a house or apartment, and meet unexpected expenses. There are some red flags and warning signs that you have made poor financial and credit decisions. If you have multiple card accounts, excessive credit card debt, and missing or late loan or card payments, you probably have less than perfect or poor credit. Getting calls from collection agencies and accounts closed by issuers are other signs that you are knee-deep in debt and need help. There are other warning signs that you need to look into different repair options, for example, having too little or too much credit and having your card and loan applications denied. Obviously, your score is the best indicator of credit problems. A FICO score below 620 means that you have poor credit.
Finding a Debt Consolidation Loan with Bad Credit
Many people check with their local banks first, especially if they are existing customers. Banks have stringent criteria for approval, however, and you may see your application turned down. Some finance companies specialize in consolidation loans for customers with tarnished credit and allow borrowers to combine payday and consumer loans into a low-cost payback solution with a single monthly payment. Look for loans with no early prepayment penalties or hidden charges.
What is the Best Way to Consolidate Debt with Bad Credit
There are different lenders that offer bad credit debt consolidation loans – payday loan providers, credit unions, and banks. The best option for customers with poor credit is probably a reputable consolidation service that charges no upfront fees and advertises generous interest savings. Credit unions are usually more lenient than other financial establishments, banks in this number. Reputable companies offer a range of options, and customers are allowed to consolidate between $2,000 and $10,000 in unsecured credit. Some providers require stable income and have minimum income requirements. If you have student loans, the best way to get out of debt is to apply for a student consolidation loan. There are two options – fixed rates and capped variable rates with terms of 5 to 15 years. Some providers also advertise loans with 20-year terms. Customers who opt for automatic payments enjoy interest rate reduction. Some issuers also offer interest rate discounts to existing customers who have checking accounts or existing loan balances. And some financial institutions even offer loan deferral options.
Are Debt Consolidation Loans Bad for Your Credit
In fact, debt consolidation loans help customers to reestablish credit. They go with lower rates and affordable monthly payments, making it easier to catch up on payments. The fact that customers have only one monthly payment means that it is easy to keep track of and avoid missed payments which affect your credit. Timely payments will boost your score and will widen the range of financial options available through mainstream financial establishments. At the same time, missing loan payments may ruin your score, leaving you with few options available, most of which carrying high interest rates. As a rule, debt consolidation has a positive effect on your score because it simplifies payments, and customers can opt for automatic payments. It is a good idea to close some existing accounts so that you avoid piling up debt again.
What are Your Chances of Getting a Debt Consolidation Loan?
Many people are unsure how to qualify for debt consolidation loan if they have a bad credit. The chances of getting a loan depend on your overall stability, employment history, and earnings. Some issuers are willing to work with customers with less than perfect credit provided that they are able to meet their payments. Finance companies often require proof of income and proof of employment such as recent pay stubs. Some issuers also look at your debt to income ratio. Your disposable income must be at least 15 percent of your gross monthly income. Your chances of getting approved for an unsecured debt consolidation loan are low if you are switching jobs often. Some financial institutions offer debt consolidation loans for bad credit to customers who have home equity. Finally, your chances of getting a loan also depend on how much you owe to different creditors.
Advantages of Debt Consolidation Loans
There are plenty of benefits for debt-ridden borrowers, one being that customers are able to eliminate debt without incurring additional charges. Budgeting and financial planning are also made easier given that customers have only one payment to make. Multiple monthly payments take a huge amount of effort and mental energy to deal with. Customers benefit from easier debt management, and payments are spread over a longer repayment term. Another benefit for borrowers is the fact that customers are allowed to consolidate different types of accounts, including credit card balances, student loans, and other unsecured debts. A further benefit is that customers can choose from several types of loans and programs, including balance transfers, and home equity loans. Unsecured loans feature shorter repayment terms and are safe for customers as they don’t risk a valuable asset. Secured loans go with lower interest rates, longer repayment terms, and affordable monthly payments. With home equity loans, borrowers benefit from the fact that interest is usually tax deductible.
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Disadvantages of Debt Consolidation Loans
While convenience and lower rates are major advantages, there are some issues and downsides. One of the downsides for borrowers is that a longer repayment term adds to the cost of borrowing. Customers pay more toward interest when payments are made over a longer period. A secured loan carries a risk in that customers risk losing their home, vehicle, or other asset in case of default. There are other risks as well. Retirement funds, life insurance policies, and other assets may be available for use only after loan repayment. Another issue is that financial institutions are less willing to offer unsecured short term loans to customers with poor credit. Those who are willing to work with customers with bad credit usually offer higher-than-average interest rates. The only option may be a secured loan with a competitive rate. In any case, stay away from providers that feature points, charge costly penalties, and advertise low introductory rates that skyrocket after the initial period. Finally, there are unscrupulous loan providers that assess outrageous charges and rates and try to take advantage of your financial worries. Avoid companies that offer help with bankruptcy, settlement, and debt management because these methods work differently. Also avoid issuers that offer credit insurance because it makes borrowing a costly endeavor.