Debt Consolidation Loan | Bad Credit Score & Repayment

Debt Consolidation Loan allows borrowers to collect a single loan that can cover the outstanding balance on unsecured loans.

The consolidation loan is used to pay off individual loans so the borrower is only responsible for a single monthly debt clearance.

This results in a more streamlined repayment process that can give borrowers access to lower overall interest rates.

When your loan applications are being evaluated, lenders generally look for a credit score starting from 580 to 620.

However, lenders consider factors like the applicant’s potential abilities to repay the loan.

Qualifying for a debt consolidation loan can be difficult if you have a bad credit score. But it’s still possible.

It is possible especially if you are open to getting a secured loan or having a cosigner.

A debt consolidation can be known as a debt management strategy that allows you to combine multiple debts in a single payment.

After all having one account can be way easier to manage.

Also, having higher than average interest rates due to low or bad credit scores or credit card debt can help you lower your average rate.

That is why the most common way to consolidate debt is to take a debt consolidation loan, It is a personal loan used to pay off multiple creditors.

Debt Consolidation Loan

Someone might get a debt consolidation loan for several reasons but the best benefit of a debt consolidation loan includes:

  1. Fixed Payment: Most debt consolidation loans always have fixed interest rates and set repayment terms.

Your monthly payment will always be the same every month, unlike monthly payments on credit cards.

Predictable monthly payment is easier to fix into your spending plan, this makes it easier to keep other bills and debts you may have on the check to prevent damage.

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2. Lower Interest rate: It is generally wise to get a debt consolidation loan if you can get a better interest rate than you are already paying.

If you are currently paying an average of 16% to 20% on your credit cards due to having a low credit score, if you can get a consolidation on 14% APR you will save money.

3. Simplified Finance: A debt consolidation loan rolls many monthly payments into one. Having only one lender and one monthly bill to worry about could aid in paying off your debt more consistently.

Also, you will avoid missed payments and help strengthen your payment history by making loan payments on time.

This will also boost your credit score in the long run.

Types of Debts You can consolidate

In general, a borrower can consolidate loans or credit lines that are not secured by a home or other otherwise collateralized.

Common types of debt you can consolidate include:

  • Credit card balance
  • Students loans
  • Unsecured personal loans and personal lines of credit
  • Payday loans
  • Income taxes
  • Hospital and other medical bills
  • Cell phone and utility bills
  • Court Judgment is not currently under enforcement through garnishment or other collection remedies.

How to Get a Debt Consolidation Loan

If you think a debt consolidation loan is a good fit for you.

You can follow these steps:

  1. Determine Your Credit Score

Before you can apply for a debt consolidation loan, first check your score on free sites or with a reporting service through your credit card company.

Lenders also generally look for a credit score between 580 and 620 when extending consolidation loans, so it is best to know your credit score before applying.

  1. Boost you’re your Credit Score

For those with poor credit scores, boosting your credit can improve your chances of qualifying for a debt consolidation loan.

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However, mending credit can be a long, difficult, and sometimes confusing process to go through.

To increase your credit score in a short term, focus on clearing your bills on time.

And keeping current accounts open and limiting hard inquiries on your credit report.

Meanwhile, keep in mind that Experian Boost can only impact your FICO Score of 8, while that scoring model is the most widely adopted.

  1. Shop for Lenders and Get Prequalified

When you review your application for a debt consolidation loan, a lender will run a difficult credit check that will negatively impact your credit score.

Once you know your credit score, you can start looking for a lender.

If you already have an existing relationship with your credit union or your local bank, then you can start from there.

But also keep in mind that they may have a more rigorous qualification.

You can also research online lenders, and compare and contrast the factors like interest rates, loan terms, and lenders’ fees.

  1. Choose a Secured Loan

If a borrower is not happy with the options following the pre-qualification process, they may increase their chances of qualifying for a consolidation loan by simply applying for a secured loan.

However, if your credit score is high enough to qualify you for an unsecured loan, it is best not to pledge collateral.

Unless you are confident in your ability to make on-time payments.

If you fall behind on payments, you can lose the asset you used as collateral.

  1. Finding Cosigner

Likewise, loan applicants with poor credit can also access better lending terms by having someone with strong credit co-sign on the loan.

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This means that if you fail to make the payments, the cosigner will answer for the outstanding balance.

In general, lenders look for co-signers who have good credit scores and who have enough funds to cover the payments on the co-signed loan debt service.

Debt Consolidation Might be Right for You

  • If your credit score is high enough to qualify for a low-interest loan
  • You have enough home equity to place your building as collateral for a secured loan
  • Your monthly debt service sums to 40% or less of your monthly income
  • If you are already taking steps to improve your finances and reduce outrageous spending
  • When your monthly cash flow always exceeds your monthly debt payments

Pros of Debt Consolidation Loans

  • It reduces multiple and several debts to one payment monthly.
  • It lowers overall interest rates
  • Improves your credit with on-time payments
  • Lowers total monthly payments by increasing the loan term
  • It can also shorten the period of time it takes to clear your debts

Cons of Debt Consolidation Loans

  • It depends on the lender and you may have to take high upfront or annual fees
  • If you have to low bad low credit score, it can be difficult to have a low-interest rate.
  • Consolidation alone doesn’t fix poor financial habits and it is not a shortcut to getting out of debt.

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