- Consolidation loans and bad credit are not a good combination.
- Two loan consolidation options for bad credit are FHA cash-out refinance and student loans.
- Be careful of consolidated personal loans and look for other debt relief solutions.
Consolidation Loans for Bad Credit - A Bad Mix
Loans and bad credit are a tough mix. Good Loan terms go along with good credit. Bad credit attracts predatory lenders, unrealistic quick fixes, and expensive loans. Consolidation loans for bad credit are no exception. If you have bad credit, it will be difficult to find a loan, especially one with attractive interest rates and terms.
Certain types of loans have less strict underwriting requirements. However, the general rule is the higher the risk, the higher the costs. Consolidation loans are not always the best debt relief solutions. Learn about bad credit and a few loan consolidation options for bad credit:
- Bad Credit – What Lenders Look At
- Loan Option #1: FHA cash out mortgage refinance. (Limited to 85% LTV)
- Loan Option #2: Student loan consolidation
- Loan Option #3: Personal Unsecured Loans
Bad Credit – What Lenders Look At
When you look for a loan, lenders verify your ability and willingness to pay back the loan. The two main criteria used are your credit profile and DTI (debt to income) ratio.
Credit profile: Your credit profile includes your credit score and payment history. Your credit report includes information about timely payments, late payments, charge-offs, settled payments, and public records such as court judgments, liens and bankruptcies. The FICO (Fair Isaac Company) score translates your credit profile into a score that lenders use to evaluate your willingness to pay.
DTI: Lenders use your debt to income ratio to evaluate your ability to pay. To calculate your DTI add up all your monthly recurring debt including mortgage or rent, credit card minimum payments, student loans, and other recurring debts. Then, divide that total by your monthly gross income. DTI requirements vary by lender and loan types.
Read the Bills.com article to learn how to improve your credit score.
Loan Option #1: FHA Cash-out Mortgage Loan
FHA cash out mortgage loans are available for bad credit borrowers, although lenders may apply stricter guidelines than the FHA requires. Here are some of the major points of the FHA cash-out mortgage:
- Up to 85% LTV.
- Low FICO score (over 500)
- Less stringent bankruptcy and foreclosure rules.
- No delinquencies on mortgage for last 12 months
- DTI of 41%, although higher if you have compensating factors.
- Requires stricter underwriting requirements if the cash-out portion is for debt consolidation.
This program is not for everyone. If you do have equity in your property and bad credit, then a FHA cash-out mortgage can help you pay off your debts and keep an affordable monthly payment.
Loan Option #2: Student Loan Consolidation
There are two types of student loans, federal student loans and private student loans. In general, private student loans require a co-borrower. Check your loan documents to see which kinds of student loans you have. The advantages of student loan consolidation are:
1. Lowers your interest rate and/or decreases your monthly payment (extending your term)
2. Reduces the number of loan payments you have to deal with.
Federal Student Loan Consolidation: Consolidating federal student loans with bad credit is possible. Student loan consolidation can be complicated, because there are different types of loans and repayment plans. Start by reviewing the information on the Department of Education’s Web site under the Federal Student Loan Consolidation page. For more information about federal student loan consolidation read the Bills.com article Stafford Loan Consolidation. Don’t forget to review all your options, including income based repayment plans.
Private Student Loan Consolidation: Lenders offer private student loan consolidation with the same underwriting criteria as any other personal unsecured loan. Lenders look for borrowers with good credit. If you have bad credit, then you will need strong co-borrower. Your co-borrower must be aware that they are liable for the whole debt, for the entire period of the loan. If there are late payments, then their credit score will be damaged. For more information read the Bills.com article student loan debt consolidation.
Loan Option #3: Personal Loans
Personal loans with bad credit are generally a terrible mix. Any personal consolidation loans for bad credit carry high risk and high financial costs. Don’t just check the interest rates, because these loans often come with big fees.
Most reputable lenders, including banks and credit unions do not offer personal loans if you have bad credit. (Even if you have good credit, the interest rates are high). Be wary of advertisements that promise you an easy loan. The loan may be easy to get, but surely hard to pay back. There are many online sites offering consolidation loans for bad credit. The loan amount is generally limited, the rates and fees are high, and you are stuck with another debt that is difficult to pay off. If you don’t pay on time, expect aggressive collection tactics.
Create a Good Mix
Bad credit is an indication that you owe too much money, and cannot afford to pay it back. If you have strong collateral, then you may be able to mix a consolidation loan with your bad credit. However, no lender wants to give a loan to someone who cannot afford to pay back the loan. Be careful of high interest rates and fees.
Before you take on any new debt, review your situation and determine how much you can afford to pay. In order to improve your financial position you need to deal with your old debt AND avoid new debt. You will not improve your situation by consolidating debt into a new loan and then running up new credit card debt. Look for other debt relief solutions including credit counseling and debt settlement.