When you lead a lifestyle financed by credit cards, sooner or later you are bound to get caught in a debt trap that has you borrowing more money just to stay afloat and pay the minimum due amounts every month. When you are struggling to manage multiple cards, it also becomes very difficult to monitor the statements and pay every month by the due dates. As a result, your credit score goes for a toss and it can become very difficult for you to access further credit, which can be very frustrating if you want to take on a debt consolidation loan to cut down on the interest expense and get your debt under control. According to https://www.forbes.com, since obtaining a low rate of interest is crucial for debt consolidation, you need to shop around and opt for a lender that offers the most reasonable terms.
Understanding Debt Consolidation Loans
Consolidating high-interest debt and paying them off with a single fresh loan can be a very smart method of saving significantly on the interest expense and wind down your debt more quickly. When you take on a debt consolidation loan, you can pay off your existing debts and just have to make one single payment every month to repay the new loan. Since the debt consolidation loan from the bank, credit union, or a private lender will typically carry a significantly lower rate of interest, you will be able to make a substantial saving and apply it towards repaying your loan faster. As is understandable, the lowest rates of interest are reserved for people with very good credit scores and progressively rise for borrowers with poorer scores till a limit is reached where credit may not be available at all unless you approach lenders who specialize in lending to customers with poor credit.
Credit Score Requirements
For borrowers to qualify for the lowest rates of interest on debt consolidation loans, you will normally be required to have a credit score of 700 and above. With the rate of interest having a very wide band from 5.99% to 35.99%, the only people who will qualify for the rates at the lower end of the spectrum are those with excellent credit. For applicants who have credit scores ranging from 640 to 699, the same lenders will charge higher rates to compensate for the extra risk. Normally, reputed lenders do not like lending to people with scores less than 630, however, if the person still qualifies for the loan due to fulfilling other qualifying criteria, the rates charged will be quite hefty besides which, steep origination charges are also likely to be levied.
Where Can People With Bad Credit Get Debt Consolidation Loans
There are several options that applicants with bad credit scores can consider for getting a debt consolidation loan:
The local credit union: The chances of getting loans with terms that are more reasonable are higher in credit unions because they operate on a not-for-profit basis for the benefit of their members. Because of the smaller geography, they operate in; they tend to know their customers better and might be more amenable to extending loans to borrowers with existing relationships even if the credit scores are relatively poor. If you are a member of the credit union, you can discuss with the loan officer your financial circumstances and persuade him to take a more inclusive view of your financial history and relationship with the bank to give you a loan with a lower rate of interest.
Online lenders: A reputed online lender like NationaldebtRelief.com can be a very good option to look for a debt consolidation loan even when your credit score has been damaged. Going online, you can compare rates and offers without the inquiries being treated as hard inquiries that will negatively impact your credit score. The application process is simple and quick without the need of submitting complicated paperwork. The loan processing is also very quick, you can get the funds in your account in a matter of days than the weeks it takes banks to do so. Due to the intense competition for business, online lenders are more likely to accommodate applicants with poor credit scores with better terms.
Home equity: If you are a homeowner with substantial equity, you can take out a second mortgage with which to repay your existing high-interest debt. The rate of interest is one of the lowest you will get since the loan is secured by the property. However, the problem is that if you default on the repayment, you could potentially end up losing your home and jeopardizing your family’s security. This is a great option if you are confident of your repayment capability, as the interest paid is also tax-deductible. The credit score of the applicant takes a back seat as the home is provided as collateral.
Be on the Alert Regarding Predatory Lenders
When borrowers have poor credit, not many of the reputed lenders are prepared to do business with them. This leaves them susceptible to lenders who charge usurious rate to take advantage of borrowers in distress. These predatory lenders are willing to work with borrowers with very low credit scores but charge interest rates that may run into three figures. Even though these lenders charge less than payday lenders, it is best not to deal with them, as there is no point in switching one set of high-interest rate debts for another high-interest rate loan.
It can be really difficult for borrowers with poor credit scores to get a loan that makes debt consolidation feasible. They will not be eligible for the zero-percent balance transfer loans or bank loans at a reasonable rate of interest. Their best hope is to try and convince the loan office of the local credit union that their dire straits are temporary and with their cooperation, they will be able to put their financial lives back in order. If they have substantial equity in their homes, a home equity loan or home equity line of credit could be the best option if they can assure themselves that they will not default and put their property at risk of foreclosure.