Finding a debt consolidation loan that fits can already present a challenge. But finding a debt consolidation loan for bad credit seems like a herculean task. But we here at CC can help make that task a little less frustrating by providing you with a list of reliable creditors and financial advice.
Should you already be aware of what kind of loan you want, then simply subscribe to our list and receive a list of lenders for free. But if you still have reservations, or are looking for additional information, then please read on.
The obvious first choice, personal loans…
Personal loans are a great choice when it comes to finding a debt consolidation loan for bad credit. They offer more flexibility and less risk for the creditor. Personal loans are used regularly not only for consolidating debt but also for several other small expenses.
A personal loan is a form of unsecured debt. Unsecured debt is a form of debt where the debtor has not put up any form of collateral. This means that the lender cant claims any property that the debtor has unless he wins at court.
Who gives out personal loans?
However, since none of the debt is covered by collateral the lender incurs more risk. More risk also means more interest on the loan. The lender does this in order to make up for the possible loss of his investment.
Personal loans are, therefore, as the name suggests, often given out by people you know personally. Friends and family tend to be more lenient with interest rates and deadlines. A good credit score and collateral are often replaced with interpersonal relationships, this helps people with a bad credit score to obtain a loan.
But not just friends and family can get involved. Law firms and financing companies can also help you obtain an unsecured loan. Law firms can, much like private lenders, tend not to overcharge interest on a debt consolidation loan for bad credit.
Finance companies might not give you a loan if your credit score is bad, but they can offer free counseling. Another option is to have a finance company manage your loans.
This works much in the same way as a consolidation loan. The company manages all the payments and you just end up paying one sum to the management company.
Bad credit, what goes into your credit rating!
Bad credit is generally associated with the payment history of an individual. The likelihood that they will fail to make payments is represented as a numerical value that companies and lenders use in order to assess the risk involved.
Bad credit makes it difficult to obtain reasonable loans with moderate interest rates. Scores under 580 are typically considered bad credit from a scale of 300-850. A credit score above 580 is usually considered to be fair.
But the closer you get to 850, the lower the interest rates will be.
A debt consolidation loan for bad credit can also help you improve your credit score. If you manage your payments in a timely manner, then your account will be in the green in no time.
How to keep your credit score from dropping!
Don’t go around closing any unused credit card accounts. Even if the accounts are unused and serve no more purpose, they still appear in the FICO databank. Closing them might drop your credit score since closing accounts may seem suspicious.
Similarly, don’t start opening new accounts. Opening new accounts might raise suspicion about your motives.
After all, if you are having trouble keeping up with your existing payments then surely opening up more accounts will make things even more difficult.
Lastly, you could try using a secured credit card. A secured credit card is similar to a debit card. You cannot fall into delinquency because you can always only spend what’s on your account. Over time, this kind of payment will improve your credit score.
The FICO score and how it’s made…
First off, the FICO score is the most common credit score used in the US. Its main function is to put a numerical value on the creditworthiness of individuals and companies. Named for the Fair Isaac Corporation, which devised it. The company has been around since 1956 and its databases have enough information to show for it.
Here is a short breakdown of the FICO score and how it measures your personal debt:
- 10%- Mortgages, car loans, credit cards, etc. A mixture of credit types makes up this 10 percent.
- 10%- This 10 percent is made up of newly acquired credit.
- 15%- These percent are interesting since they are made up of the length of a person’s credit card history. This means that the lack of a credit card in younger years will already set you back in the score.
- 30%- Credit card utilization ratio and the total amount that someone owes. We will go into depth about the utilization ratio below.
- 35%- The personal payment history. All this indicates to the FICO score is whether or not the bills were paid on time. An important thing to keep in mind is, that even a few days of delinquency can be factored into the score.
The credit utilization ratio compares the maximum amount a person can borrow, to the amount they owe at any given time. This means that card limits or other mortgages are actively being compared to the total amount of a person’s debt. A ratio of 20% to 30% is already enough to negatively impact your credit score.
Good scores and bad scores, what’s the difference?
The scores range from 350 to 850. The latter being a perfect score while the former indicates that a person couldn’t pay back a lollipop. The average FICO score in the US is around 695, which isn’t all too bad.
Scores of 579 and below are generally considered scores that reflect bad credit. The issue with this number lies in the sheer amount of people who score below 579. As many as 62% of lenders are below that line and are essentially in a state of bad debt.
Anything at or above 580 to 669 is considered fair. But even borrowers with these scores might face unreasonable interest rates, compared to higher scores that is. The chance of delinquency is just too high with lower scores, which in turn makes the interest skyrocket.
What credit score do you need for a good debt consolidation loan?
580. A score of at least 580 is required to have access to good debt consolidation loans. This does not mean that a consolidation loan for bad credit doesn’t exist, it is just very difficult to find.
My credit score is only 500, can I still get a loan approved?
Yes, your best option would be a Home Loan. These types of loans have a range starting from a credit score of 500-550. If you manage to pay 10% down, then you can qualify for an FHA loan.
What are the cons to consolidating debt?
If the loan is unsecured, then a high-interest rate might head your way. If you secured the loan with collateral, then your house, life insurance, retirement found, etc. could be claimed by the credit company.
Is it possible to get a loan to clear my debts?
Yes, debt consolidation loans can incorporate all of your debt into a single payment. This means, however, that you still haven’t cleared your debt. You are simply consolidating it into one loan, ergo into one payment.
What are good solutions for too much debt?
There are several options out there. Debt relief orders, debt management plans, debt consolidation loans, Individual Voluntary Arrangements, and administrative orders are all viable options to help you get out of debt.