Should You Take a Bad Credit Debt Consolidation Loan?
If you are struggling with debt, a debt consolidation loan can be an attractive option. It could save you money. You wouldn’t take out a debt consolidation loan unless it improves your financial position, by lowering your total interest costs for borrowing, delivering you a more affordable monthly payment. Both are reasonable goals. Convenience is another benefit. It is easier to make one payment each month than a slew of different payments with separate due dates.
It is common for people overwhelmed with debt to think that if they could borrow enough to pay everything off they would have a fresh start and be able to take control of their finances. The catch is that many people who are struggling with debt have bad credit, which makes it hard to qualify for a debt consolidation loan.
Shopping for a Debt Consolidation Loan with Bad Credit
Shopping for a bad credit debt consolidation loan is frustrating, and can even be dangerous. It is easy to get frustrated when one lender after another turns you down.
If you speak with traditional lenders, such as banks or credit unions, you will find out that you need good credit to get an unsecured personal loan and excellent credit to get a low-interest personal loan excellent credit. You will find out the same thing if you speak peer-to-peer lenders or online lenders that service the prime customer.
There are some bad credit personal loans available. Unfortunately, theys come with high fees and crazy-high interest rates. For example, one lender is advertising a "less than prime" loan, available in California, where you borrow $10,600, pay a fee off the top of $2,500, and your interest rate is 74%. The term of the loan is 7 years, so you would make 84 monthly payments of $657.98. You get $8,100, after the fee, and pay back $7,895 each year for seven years. Rates are even higher for smaller loan amounts, with a $2,600 loan advertised with a rate of 174%! There are borrowers who find these costs acceptable for the benefit of the money they get. Debt consolidation with this type of loan is usually done to avoid default or some serious negative consequence. It certainly is not going to lower your interest rate.
Payday loans are another personal loan available to people with bad credit. The loans are limited to small amounts. In California, the maximum payday loan is $300, so debt consolidation is not an option.
It's very hard to qualify for a debt consolidation loan with bad credit. Make sure that you look at all your options. Bills.com has pre-screened debt relief providers who can help you understand the different debt solutions available.
Don’t get scammed! If you are desperate for a loan and are getting turned down repeatedly, you may be lured by an ad you see that says “Bad Credit Debt Consolidation Loans. No one is turned down.” There is no such thing as a lender who makes loans to everyone. No one is an easier victim to scam than someone who needs something desperately. The most common scam is charging a fee for your application. Never pay a fee in advance for a loan. The fee will be taken and you won’t get the loan.
What to do?
The reality is that bad credit debt consolidation loans are usually not an option. If you are struggling with debt and have bad credit, a loan is not going to solve your problem. You can’t borrow your way out of debt, when the rate you get will crush you.
To get out of debt, you need to review the different debt relief options available. You can try to solve the problem on your own or you can find the right kind of professional assistance.
Two common professional options for getting out of debt are credit counseling and debt settlement. Both options consolidate your payment. You will make only one monthly payment. Neither, however, truly consolidate your debt. You still owe your creditors. Both programs work with the individual creditors on your behalf.
The smartest thing to do is to compare the different options and weigh the pros and cons. Bills.com created the Debt Navigator, a free tool that helps you find the right solution for your debt problem based on goals and priorities you specify.