Student loans, auto loans, credit cards, and what have you — all these assorted loan payments rack up a high monthly bill that eats most of your income. But what if you can trim down these monthly costs to something more manageable? What if you can pay an amount that frees up your earnings so you can allocate extra cash to something we all need, like savings. Well, that’s what a debt consolidation loan is for, and this article discusses how this loan type can help you in your current financial situation.
But first, here are some of our top choices of personal loans for debt consolidation for bad credit:
A debt consolidation loan converts multiple debts into a single monthly payment. Banks and credit unions, and even online lenders offer this type of loan with different sets of requirements. When you apply and get approved for this loan, the funds you receive from the lender will be used for paying off all the other amounts you owe.
Its purpose is to make your finances easier to handle. Since different loans will have varying rates, and credit card bills could have mounted up to excessive amounts due to unpaid balances, combining them into a single payment eases up the burden and makes everything more convenient.
To qualify for this specific loan type, you need to supply certain documents that verify your income and identity. Income proof may include pay stubs, past tax returns, and bank statements. On the other hand, identity proof may need you to provide a valid ID, which can be a copy of your passport, tax ID, etc.
Additionally, you may need a decent credit score (upwards of a 640 FICO score) to qualify, and this is checked through your credit report, which the lender has to pull up. Of course, different lenders will have different requirements, as mentioned. Therefore, you may find plenty of debt consolidation loan options even for those with less than 640 FICO scores.
Taking out a new loan is usually frowned upon, but debt consolidation serves a particularly useful purpose. Now, normally, you’d obtain the least favorable rates when you apply for this kind of loan if you have a poor credit score. Nevertheless, if you’re stuck with collectively much higher payments and rates from all your other credit sources, then it might be a smart move to have everything consolidated into one loan.
If you still have a low credit score by the time you apply for this loan type, it is rather likely that the multiple debts you have are derived from high-interest lenders. Therefore, a bad credit debt consolidation loan wouldn’t be such a bad idea if it is geared towards eliminating loans with usurious rates.
Debt consolidation loans are also vital in improving your credit score. Because as you make payments more manageable by utilizing only a single lender, you have effectively relaxed your financial burden, allowing you to make easier payments and better your payment history.
Apart from this, you also reduce your credit utilization ratio. And both of these are positive for your credit score in the long run.
For you to fully appreciate this financial product and possibly help you decide whether you should avail of it or not, here is a summary of the pros and cons of personal loans for debt consolidation:
Lower Rates: Streamlining all your debt into a single payment would allow you to shop around for competitive rates among lenders. And by far, this is what makes ultimate sense when subscribing to this loan option. Because the best thing you'd want is to cut down what lenders charge you and make sure that the next credit you're applying for offers something more favorable. This allows you to save money from interest expenses on all your debt sources.
It extends your debt: A critical downside of using a debt consolidation loan is the length of time you'll be paying off some of your debt could get extended. And this is because a longer repayment schedule is the only way to lower down your monthly payments and rates.
Lower Monthly Payments: The idea of consolidating all your liabilities is to make everything lighter for you financially. A large part of that is achieved through lower monthly payments of all your debt. And the whole point is to get some of your income back, which lenders of this loan type provide.
Your debt is not reduced: One thing you have to come to grips with is that the total amount you owe is not reduced, let alone forgiven. What only took place is that you transferred your liabilities to a single loan that you still have to pay.
Simplifies your Finances: Multiple loans and bills, particularly credit card bills, are a headache to deal with, especially if each of them has varying due dates and you don't have enough cash to pay the outstanding balance. A single loan to merge everything in one payment and one due date simplifies what you have to grapple with financially.
As we stated above, you don’t actually free yourself from debt when you obtain a debt consolidation loan. You only reorganized your financial obligations into something more manageable based on your income and current expenses.
So, this means that you may still wound up back in the same financial mess. Therefore, to completely unshackle yourself from your debt concerns, you can follow our tips below:
Now, a debt consolidation loan isn’t the only solution to your problem. There are alternatives to this loan type that do as good a job. For example, if you’re merging primarily credit card bills, you can opt for a balance transfer card, which allows you to combine everything in one payment at zero interest.
You can also negotiate with your lender for debt relief through a third-party company or a lawyer. What debt relief essentially does is settle all the amount you owe for something much less. However, not all banks and credit unions offer this alternative.
And, lastly, you could file for bankruptcy. This will involve the federal court to afford you more repayment time or debt forgiveness. But the downside is this will negatively impact an already bad credit score so much that it may be even harder to secure credit next time.
In the short term, it may, but if you can accomplish loan payments consistently each month, a debt consolidation loan might actually boost your credit score in the long run.
Often a FICO score higher than 640 is necessary to get approved for a debt consolidation loan. However, some lenders overlook your credit score as a criterion for approving this loan type.
You can save money on a debt consolidation loan because you effectively combine everything you owe at a much lower rate.
The only guarantee with a debt consolidation loan is that you will get a single payment for all your multiple credit sources. But the assurance that you will no longer be swimming in debt is dependent on you.
You can check for reviews online about the lender from its past customers. Apart from that, you can also check with the Better Business Bureau for the lender’s ratings to get a good judge of what they’re like as a company.