Most people carry some form of debt. Whether it is a mortgage or car payment, or credit card and personal loan debt, 80 percent of Americans owe money to a creditor of some kind (source). If your debt becomes too much to handle, you may begin to make late payments or even miss payments entirely. This causes your credit scores to plummet. If this has happened to you, you are likely in need of some sort of debt relief.
The bad news is that if your credit score is bad, debt relief is harder to come by. The good news is that you still have options for debt relief, even when you have bad credit.
What is the purpose of a debt consolidation loan?
The purpose of a debt consolidation loan is to combine all your unsecured debts into one loan. Ideally, this loan will have a lower interest rate than you are currently paying for all your loans individually. For instance, the average interest rate on credit cards is currently 15.22 percent (source). Let’s say that you combined all your credit card debt into a loan with an interest rate of 10 percent. It is easy to see how that would save you considerable money over the life of your loan.
However, for people with bad credit, it is often difficult to obtain a loan with a reasonable interest rate. In general, the lower your credit score is, the higher your loan interest rate will be. This means that you may have to be creative to find a loan option that works for you. You may also have to consider a loan with a higher interest rate than you would like to have.
When examining your options, it is important to really consider the full consequences of obtaining a consolidation loan. You may find that it is not a good idea for your particular situation.
What types of debt consolidation loan options are available for people with poor credit?
Common types of debt consolidation loans are:
- Unsecured personal loans.
- Secured personal loans.
- Business loans.
- Balance transfer credit cards.
- Home Equity Lines of Credit (HELOC).
So, which are the best options for people with bad credit? And which lenders offer those options?
Home Equity Lines of Credit (HELOC)
If your FICO credit score is below 640, your options for debt consolidation loans narrow considerably. If you own your home and you have lived in it long enough to build equity, you may find that your best option is a home equity line of credit (HELOC).
A good first place to look for a HELOC with the lender who handles your first mortgage. If your payments to that lender have been on time and there are no delinquencies in your first mortgage payment, your lender may be willing to offer you a home equity line of credit with a reasonable interest rate. If traditional banks turn you down, you might try a credit union. Keep in mind, however, that it is not unusual for a person with poor credit to be turned down when requesting a home equity line.
Secured Personal Loan
Another option is a secured personal loan. A common type of secured personal loan may be a car title loan. With this type of loan, you can still use your car, but your lender holds the title to your car until your debt is paid. While this may sound like a good idea, this type of loan typically carries a high interest rate. Worse yet, if you fail to repay the loan, you forfeit your car.
If you feel that a secured personal loan is your best option, you might consider TFC Title Loans.
TFC Title Loans has high interest rates but accepts borrowers with all type of credit scores. Its loans are secured by the title of your vehicle and have high interest rates, around 96% APR. Unless your interest rates with your other loans are higher, avoid consolidating loans with a title loan. If you fail to make payments on the loan, you could lose your vehicle. However, even borrowers with bad credit can get loans of up to $50,000.
Unsecured Personal Loan
With an unsecured personal loan, you do not encumber any personal property as collateral. Unsecured personal loans may have a higher interest rate than secured loans. If you feel that an unsecured personal loan is your best option, you might consider NetCredit.
NetCredit provides unsecured loans ranging from $1,000 to $10,000. Interest rates vary from 35% to 150% APR, depending on your creditworthiness.
Bad Credit Business Loans
If you need help with business debt consolidation and you have bad credit, you might consider Funding Circle.
Funding Circle: Funding Circle allows accredited investors and institutions to lend money directly to small businesses without the need of a bank. The loans are underwritten by Funding Circle loan specialists that assign each borrower a risk score ranging from A+ to C. Loans are secured by the business assets and a personal guarantee from the primary owners. Funding Circle loans range from $25,000 to $500,000. Interest rates range from 8.99 to 20.99 percent. Loan terms are 2 to 5 years.
Balance Transfer Credit Cards
Getting approved for a balance transfer credit card with bad credit is not an easy feat. To acquire a 0 percent introductory rate balance transfer card usually requires having a good to excellent credit score. However, it is sometimes possible to find a card that will work for you even when you have poor or fair credit. You might consider the Chase Slate credit card.
Chase Slate offers 15 months of 0% APR on balance transfers and doesn’t charge a balance transfer fee.
What is the difference between debt consolidation and debt settlement?
Any of the debt consolidation options listed herein may provide you with a measure of debt relief even if your credit scores are low. However, it is important to note that these options may not be the best alternatives for you to consider.
Debt consolidation is designed to help you combine your existing unsecured debt into one loan. With a little luck, the loan you get will have a lower interest rate than what you are currently paying. However, because it is difficult to find a low interest rate when your credit is poor, debt consolidation may not work for you.
Also, debt consolidation does not eliminate any portion of the principal debt you owe. For instance, if you owe $5,000 on credit card A and $2,000 on credit card B, consolidating those debts onto one credit card will still mean you owe a total of $7,000. The only difference is that you will be paying one payment instead of two and hopefully, you will be paying less interest on the total.
Debt settlement, on the other hand, works differently. With debt settlement, you or the debt settlement company you hire will negotiate with your creditors to lower the total principal amount you owe. In some cases, your debt can be reduced by as much as 30 to 50 percent of the original amount owed. Using the figures from the example above, that would mean that instead of paying $7,000, with a debt settlement, you might only have to pay $3,500 to $4,900 to your creditors. Debt settlement enables you to get out of debt more quickly than debt consolidation.
However, debt settlement does have its drawbacks. Even though you will be able to get out of debt more quickly with debt settlement, it will have a negative effect on your credit score for at least seven years. Of course, if your credit is bad and you already have several missed payments on your credit history, debt settlement may be your best option.
When should you consider debt settlement?
Debt settlement should be considered as a viable option when you are unable to pay the full amount of the debt you currently owe. To preserve your credit rating, you will want to consider all your other options, including debt consolidation, before choosing debt settlement.
The largest drawback of debt settlement is its negative effect on your credit score. However, for those with poor credit, debt settlement may be the best solution because it enables you to get out of debt more quickly. Once completely out of debt, you can take steps to repair your credit and ultimately lessen the impact of debt settlement on your score. To explore your debt settlement options more fully, get a free debt settlement consultation.