You are tired of the mound of debts sitting on your desk. Every month feels like a juggling act. You want to get out of debt, but you have bad credit. They often go hand-in-hand. How can you get help if your credit score is too low? No lender will give you a new loan, right? Luckily, there are options. It may take some legwork and research. In the end, you may find a lender that will help you consolidate your debt.
Have a Plan
Before you start, you must have a plan. You can’t just apply for loans and hope for the best. Lenders want to know what you’ll do with the money. They can see you are already well into debt. They want a reason to give you another loan. If your plan shows them you’ll pay the debts off with the funds, it could help your chances.
Lenders care about your credit score as well as your debt ratio. It’s like a puzzle. They put the pieces together to decide if you are a good risk. Oftentimes, a bad credit score isn’t enough to not give you a loan. It’s when you combine it with a high debt ratio or sketchy employment that things fall apart. Having that plan to pay your debt off can help lower your debt ratio and secure the approval.
Below we’ll discuss the options you have for debt consolidation even with poor credit.
Apply for an Unsecured Loan
Many lenders serve borrowers with bad credit. Don’t assume every lender requires an excellent credit score. Instead, shop around. There are lenders called subprime lenders. They usually accept lower credit scores. There may be a tradeoff for this, though. You’ll pay either high fees or high interest rates. You may even pay both.
Before you sign on the dotted line, know what you’re getting into. Talk to the lender about the fees they charge. Ask if there’s any room for negotiation. You should also know the full implication of the interest rate. Don’t just look at it as a rate. See how it affects your payment. Also, look at the bottom line. How much will the loan cost you in the end? You’ll pay that interest until you pay the loan off. If you drag it out for many years, the amount could add up. Make sure it’s worth consolidating your debt before taking the new loan.
Apply for a Secured Loan
A secured loan gives lenders the satisfaction that you’ll pay the loan. If you don’t, they get your collateral. The most common type of secured loan is a mortgage. It can be a first mortgage or a home equity loan. However, you can also borrow against your car, 401K, or even your life insurance.
Secured loans aren’t nearly as risky for lenders. In return, you can score lower interest rates. You may even pay lower fees. Lenders often charge origination fees in order to make a profit upfront. This way if you default on your loan, they made a profit already. With a secured loan, though, they have the guarantee of your collateral.
Check out Peer-to-Peer Lenders
Sometimes you can cut out the middleman and just get the loan you need. In this case, the middleman is the bank. You can do this with peer-to-peer lending. Today several companies offer this service. They match up the investor and the borrower. Oftentimes borrowers break up their investments over a few loans. This way they disburse the risk. Investors can then accept lower credit scores without worry.
Try a Credit Union
Today there are many credit unions. You don’t have to work for a specific company to belong to one. Search in your area for a local credit union and how you can join. Oftentimes people within a specific community have access to a credit union. For example, some credit unions offer access to those who live within a 25-mile radius of their branch.
Ask Someone to Cosign
If your credit isn’t good enough for a loan, someone close to you might be able to help. Cosigning on a loan is serious business, though. Make sure it’s someone you have a good relationship with and that trusts you.
You’ll need someone that has good credit. This helps offset your bad credit. Lenders look at your application as less risky this way. They know if you default on the loan, they can come after the co-signer. The better the cosigner’s credit, the more likely you’ll get approved.
Talk to a Credit Counselor
As a last resort, you can talk to a credit counselor. These are usually non-profit agencies that help people just like you. They’ll go over your finances and help you see where you went wrong. They then help you put a plan together to make things right.
Look for an agency that will work with your creditors. You don’t want debt settlement – that just hurts your credit even more. Instead, you want debt consolidation. The credit counselors have the experience in dealing with the creditors. They can negotiate lower interest rates and terms. Some even help you make your payments on time. Instead of you paying the creditors each month, the agency does it for you. They only do so after you send them the lump sum payment, though.
Work on Your Credit
If none of these options work, you may have to go back to square one. It’s time to fix your credit. Get a copy of your credit report from each credit bureau. Trans Union, Equifax, and Experian each offer one free credit report annually. Go over the report and see what’s wrong. Then do what you can to fix it.
- Late payments – Start making your payments on time. After a few months, you’ll start to see an improvement in your credit score.
- High utilization rates – Pay off some of your debt. Make your outstanding balance no more than 30% of your available balance.
- New accounts – If too many of your accounts are new, just wait it out. The older the accounts get, the more your credit score increases. Just make sure you don’t open any new accounts in the meantime.
Once your credit score increases, you can try one of the methods above again. If you can use one of the do-it-yourself debt consolidation options, you’ll be better off. You’ll usually save the most money and have a better chance at actually getting out of debt.