If you are dealing with bad credit, you’re not alone. Americans are said to be in debt to the tune of $12.29 trillion, according to a report from the Federal Reserve Bank of New York.
Those facing serious debt problems are somewhat limited in their options. There is negotiating with creditors, which rarely works. You can file for bankruptcy, but that can take years to recover from. Or you can explore debt consolidation loans for bad credit.
Debt consolidation with bad credit may not work for everyone. You will need to thoroughly assess your financial situation to determine if you can repay your debt. If the answer is yes, getting your personal debt down to one simple loan payment may be the way to go.
For those drowning in debt, continue reading for a guide to debt consolidation.
Determine How Much Debt You Have
The first step to tackling your debt is being honest about it. Make a list of all creditors, outstanding balances and the current status of the debt.
For those that are past due, find out if you are in collections and if the debt has been written off. In these cases, the lender may be willing to accept a lower payoff amount.
Once you get a clear picture, do a debt-to-income ratio. This will tell you if you can realistically pay off your personal debt while paying your rent, car payments, utilities and other expenses.
Know Your Credit Scores
Your credit score will determine what loans are available to you and how much interest you will pay. You will want to find the best loans for bad credit.
Start by taking advantage of your free annual credit report. Place your request with each of these major credit reporting agencies:
Equifax – www.equifax.com. P.O. Box 740241. Atlanta, GA 30374-0241. 1-800-685-1111.
Experian – www.experian.com. P.O. Box 2104. Allen, TX 75013-0949. 1-888-EXPERIAN (397-3742)
TransUnion – www.transunion.com. P.O. Box 1000. Chester, PA 19022. 1-800-916-8800.
Once you have your reports in front of you see where you rank on the credit scale. Credit scores range between 300 and 850, depending on the agency.
Is Debt Consolidation With Bad Credit Right For You?
Now that you know your debt and your credit score, is a bad credit debt consolidation loan right for you?
- The benefits of a debt consolidation loan are:
- Getting your debt down to one manageable monthly payment.
- Having set terms to repay your debt, i.e. one interest rate and length of the loan.
- You can include credit card, medical bills, and other debts.
- Paying on time will help rebuild your credit.
Once you’re approved for a loan it is a good practice to close all accounts once the balances are paid off. This will help prevent you from getting back into debt.
If this sounds good, let’s look at the best place to get a loan with bad credit.
1. Retirement Accounts
Borrowing from your retirement account should always be the last option. However, if your debt is causing undue stress and you can’t qualify for a personal loan, it should be considered.
This type of loan has risks and you can be penalized at tax time if the money is not repaid according to the terms of the withdrawal.
You may also want to look into your life insurance policies to see if you can borrow against the policy.
2. Home Equity Loan
One benefit of owning your home is over time you build up equity. Having sufficient equity in your home can come in handy if you are in need of cash.
Home refinancing may be the best loans for bad credit but could be difficult to obtain if your credit score has really tanked. Most home equity loans come with a lower interest rate. However, finding a lender willing to take a risk on someone with bad credit will come with a higher interest rate.
Your monthly mortgage payment will increase and it could also extend the terms of your loan. Sometimes high-risk mortgages come in the form of a balloon loan. Lenders often suggest refinancing a balloon mortgage again when your credit score improves.
Weigh the pros and cons of refinancing, because failure to repay the loan can land you in foreclosure.
3. Credit Card Balance Transfer
If you are lucky enough to get a no or low-interest credit card offer with a balance transfer, you may be able to move debt from other cards.
The upside to this method is you can move debt and save on interest. The downside is the introductory rates only last for 12 – 24 months. The rates will then increase based on your creditworthiness.
Also, with credit card balance transfers, only debt from major credit cards like Visa, Mastercard and Discover can be transferred.
4. Unsecured Personal Loans
An unsecured personal loan is one that does not require collateral. It would be difficult to find a bad credit debt consolidation loan that is unsecured. But don’t count it out.
The downside to this option is that the interest rates will be much higher if there is no collateral to secure the debt. However, the higher rate may be worth it to avoid a car or other possession if you are unable to repay the loan.
5. The Best Place to Get a Loan With Bad Credit
A debt consolidation loan for bad credit will most likely be your only true option to reconstruct your debt. They are typically offered by banks, credit unions, and other lending institutions.
With a debt consolidation loan, you will be able to get from under high interest rates charged by credit card companies. The lender will work within your budget to determine a repayment schedule.
Be careful, a longer repayment period will get you a lower monthly payment, but in the long run, you will pay more interest.
Have You Found This Guide Useful?
Getting out of debt isn’t as easy as getting into debt. Once you realize you’re in over your head, it’s time to seek viable solutions.
Debt consolidation with bad credit will help you avoid bankruptcy and regain peace of mind.
If you are looking for debt consolidation options, check-out Bonsai Finance for personal loans for bad credit.