- Consider a 401(k) loan.
- A refinance mortgage loan might help, if you own a home with equity.
- Look into a p2p loan.
Learn How to Find A Debt Consolidation Loan if You Have Bad Credit
Some Bills.com readers who have bad credit mention unsecured loans as a means of consolidating their debt. In theory, it is possible to get an unsecured loan to consolidate debt. However, in practice, most people who want or need an unsecured loan to consolidate debt do not qualify for an unsecured loan. Why? Lenders want three things in a perfect borrower:
- Stable income
- Excellent credit history
- Low debt-to-income ratio
Two items on the list, credit history and low debt-to-income ratio, trip up many people seeking a debt consolidation loan. This is a classic catch-22 situation. The potential borrower would not need a debt consolidation loan if they had excellent credit and a low debt-to-income (DTI) ratio, and a person who needs a debt consolidation loan almost always has a high DTI and marginal credit. For these reasons, a person with low credit seeking a debt consolidation loan should look for a debt consolidation program or think creatively about a loan source.
Home Equity Loan
A home equity loan is a popular type of debt consolidation loan. Tighter lending guidelines along with a significant drop in property values in many parts of the country have made this kind of secured debt consolidation loan more difficult to obtain. A cash-out refi or a HELOC requires good to excellent credit, strong DTI, and most importantly, significant equity in the home. The days of 100% financing are gone; most lenders do not offer cash-out financing above 80% of your home's value.
If you have equity in your home and your DTI and credit score meet lenders' guidelines, a cash-out refi likely offers you the lowest interest rate long term financing possible. However, there are significant risks to loading your home with debt.
Peer-to-peer (p2p) loans are, as the name suggests, loans between people that are mediated by a third party. In some p2p loans, the borrower writes a proposal and investors choose whether to fund the loan. In other p2p loans, an intermediary funds the loan, combines the loan with others, and sells shares in the loans to investors. Two p2p loan resources you may want to explore are Prosper.com and Lending Club. See the Bills.com peer-to-peer resource to learn more.
A 401(k) loan, if allowed by the rules of your 401(k) plan, is a withdrawal from your account that you repay with a modest interest rate. The interest paid goes to your account. In other words, you pay yourself the interest. There is no tax consequence for a 401(k) loan that is repaid. The risk of a 401(k) loan is the tax penalty you must pay if something prevents you from repaying the loan as agreed. Consult with your 401(k) administrator to learn your plan's qualification rules.
Improve Your Credit Score
If you cannot find a loan that suits your needs, consider improving your credit score. The more you can increase your credit score, the better loan terms you will be able to obtain. There are many steps you can take to help improve your credit score. The most important thing you can do is resolve any outstanding delinquent accounts, then make sure to make all payments to your creditors in a timely manner.
Having several accounts with long histories of timely payment should have a positive influence of your credit rating. If you do not have many credit accounts, such as credit cards, open some new accounts to help you build a positive credit history. Ideally, you should pay off the balance of your credit cards each month, but if that is not possible, at least make your minimum payments on time to help build your credit score.