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Are There Debt Consolidation Loans for Bad Credit Profiles?

Update: In recent years, peer-to-peer (P2P) lending opportunities have increased the options for people looking for a debt consolidation loan with bad credit. It is one of the fastest growing segments in the financial lending market, projected to reach $460 billion by 20221. P2P lending bypasses the banking loan system and allows regular people to organize loans between one another, usually through a website.

It may be easier to get a loan from these P2P lending websites than from a bank. However, P2P lenders are still wary of borrowers with poor credit scores and adjust their interest rates accordingly. While P2P loans have made it easier than ever to get a debt consolidation loan with bad credit, consolidating your debt without a loan may still be a better alternative for you.

A debt consolidation loan can be a great tool for people with bad credit to help them get their finances back on track. By combining your existing bills into one new, monthly payment, you’ll be able to pay off most of your debts and work on becoming debt-free for the long term. But if you’re one of the many consumers with bad credit, you may be wondering whether you even qualify for a consolidation loan. 

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As with any loan, your credit affects the type of debt consolidation loan you can get, as well as the features of the loan.   

Banks vs. Debt Consolidation Companies

Getting a debt consolidation loan when you have bad credit can be tough, especially if you seek help from the wrong source. While your bank or credit union may offer various personal loans for debt consolidation, it’s possible you won’t qualify if you have blemished credit. In general, banks and credit unions have strict loan criteria and only lend money to those with good or excellent credit.

If you’re turned down for a debt consolidation loan by your bank or credit union, you may want to research debt consolidation companies, which tend to cater to consumers with less-than-perfect credit. But beware of the numerous scams and fraudulent companies out there; they could put you in a worse financial situation than you’re already in. Take the proper steps to ensure you work with a legitimate, trustworthy debt consolidation company. Before you get started, learn more about what to look for in a debt consolidation company.

Risk-based Pricing

You may have heard the term "risk-based pricing" in regards to debt consolidation loans for people with bad credit. So what does it mean? Lenders look at your total financial picture when determining the loan amount and the interest rate you’ll pay on a debt consolidation loan. The better your credit, the more you’re able to borrow at a lower interest rate. On the other hand, bad credit will limit the amount you can borrow, and you’ll pay back the loan at a higher interest rate than someone with stellar credit.

So if you’re one of the millions of consumers with less-than-perfect credit, what can you do? Start by boosting your credit score.

Monitor Your Credit Score

When considering a debt consolidation loan, people with bad credit may first want to take a look at their current financial situation and work on improving their credit score. Nearly 36% of Americans think checking their credit score is not important2. While this might be true if you know you have a great score, chances are if you are considering a debt consolidation loan, you should be monitoring your credit score and working to improve it.

As a consumer, you’re entitled to a free copy of your credit report once a year from each of the three credit bureaus. Take the time to review it and look for any errors; contact the credit bureaus (Equifax, Experianor TransUnion) if you see anything that you don’t recognize. You should also be sure to:

  • Make your payments on time, every time.
  • Pay down some of your debt – start with a small unpaid balance that won’t seem overwhelming to pay off.
  • Resist the urge to open new accounts; not only will it make bad credit worse, but it could put you even deeper into debt.

Creditors generally report information on your payments – both positive and negative – every 30 to 60 days. That means you can monitor changes to your credit score periodically. Being aware of your credit standing could really help you when applying for a debt consolidation loan.

Alternatives to Debt Consolidation Loans for People with Bad Credit

Most of the advertising to people with bad credit is centered on debt consolidation loans. But you should know there are alternatives that may be a better fit for you. They include the following:

  • Debt Management Plans– A Debt Management Plan (DMP), such as that offered by the providers of CareOne Debt Relief Services, is a consolidation service that may help you pay down all of your debt within five years. You may enjoy a lower interest rate than you’re currently paying to your existing creditors, meaning you could save money every month.
  • Debt Settlement– With debt settlement,you make monthly payments that you can afford to your debt settlement provider for deposit into an escrow account. Meanwhile, the provider negotiates with creditors for a lower settlement on the outstanding sums you owe. Once an agreement is reached, the deposited funds are paid to the creditors.  This option is best for people with bad credit who can’t afford monthly payments, are looking to avoid bankruptcy, and just need a way to get out of debt as quickly as possible.

Whether you decide to apply for a debt consolidation loan or an alternative plan, you’ve made a smart choice to get out from under your bills and start on a path to becoming debt-free. You can always look to the CareOne website for detailed and valuable information about debt consolidation loans, debt management plans, and debt settlement

1 - Allied Market Research - P2P Lending Market Overview
2 - Credit Donkey - 23 Credit Score Statistics

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