It’s no secret that most Americans struggle with the treacherous and almost unavoidable occurrence of debt. As a matter of fact, the average household in the United States has approximately $133,000 in debt. Most of this debt comes from credit card accounts. This can be a burden to say the least, and some people have to fight to try to regain financial freedom again.
If too much debt has damaged your credit score, then consolidating that debt into a single loan can be the first step towards solving the problem. This is where a debt consolidation loan comes into play. A Debt Consolidation Loan is a personal loan that pays off multiple debts, such as credit cards and student loans. The loan is paid back with a single monthly payment at a fixed rate over a period of time.
Getting approved for a debt consolidation loan is determined among several factors, including your credit score and history. If you have low average to bad credit (below 660 credit score) you may still qualify for a debt consolidation loan but your interest rate will be high. Rates could be as high as 30% which would defeat the purpose of paying off your debts. However, by paying off all those high interest debts with a single low interest loan, you can get out of debt quicker and cheaper! A reputable lender will offer several different debt consolidation loans for people with bad credit. If you decide to choose this route, thoroughly do your research and make sure lenders are being transparent about what your monthly payment and interest rate is.
Top 5 Debt Consolidation Loan Companies
Like I mentioned above, choosing the best company for your debt consolidation loan will be mostly a matter of research. You’ll want to compare loan terms from highly reputable debt consolidation agencies. Our experts from BadCredit.org have listed the Top 5 Debt Consolidation Loan Companies:
7 Debt Consolidation Loans for Bad Credit Alternative Options
Debt consolidation loans for bad credit are difficult to come by, or come with high interest rates. The great news is that there are other ways to get out of debt besides through a debt consolidation loan. You should know all of your options before doing anything.
Debt Consolidation Loan Alternatives
- Debt Management Plan (DMP)
- Home Equity Loan
- Cash-out Refinance
- Balance Transfer
- Debt Settlement
Debt Management Plan (DMP)
A debt management plan, or DMP, is offered by credit card debt consolidation companies. Usually referred to as non-profit credit counseling, your cards will all be closed. The company you choose to work with will negotiate your interest rate down and set up a repayment plan with one fixed monthly payment. The great thing about this option is that your credit score doesn’t matter at all. Everyone is accepted.
Pros of Debt Management Plans
- Consolidate debt even with poor credit
- Lower your interest rates
- Have just one monthly payment
Cons of Debt Management Plans
- Comes with monthly fees
- You could set up a DMP on your own
- Black marks added to your report
- Unable to attain new credit while in the program
Home Equity Loans and HELOC
If you own your own home and have built up equity you can use that equity as collateral for a loan (also called a second mortgage). Many people use the money from a home equity loan to pay off credit card debt.
HELOC stands for a home equity line of credit and works like a credit card. A home equity loan will have lower rates than a debt consolidation program. However, these loans will require good credit history (660 FICO score or higher), but this is one of the cheaper debt relief options because it’s a low-interest loan.
Pros of Home Equity/ HELOC Loans
- Lower rates than debt consolidation loans
- Long terms between 5-7 years Interest may be tax deductible
- Pay off high interest accounts with a low interest loan
- Longer repayment terms means low monthly payments
Cons of Home Equity/ HELOC Loans
- Turning unsecured debt into debt secured by your home If you fall behind on payments your home is at risk of foreclosure
- Credit cards debts are eligible for bankruptcy, home equity loans are not
A cash out refinance is similar to a home equity loan. However, instead of having two mortgage payments with two lenders, you will have a single payment to one lender. A lender will refinance your primary mortgage plus give you up to 80% of the value of your home in cash. One of the great benefits of a cash out refinance is that the credit requirements are lower than home equity loans (as low as 620).
Pros to a Cash-Out Refinance Low rates
- Can qualify with scores as low as 620 Interest paid may be tax deductible
- May get a lower rate on your original mortgage
- Cons to a Cash-Out Refinance High upfront costs
- Unsecured debt can be discharged in a bankruptcy, your home cannot If you fall behind on payments your home is at risk of foreclosure
Balance Transfer to a 0% Interest Card
There are several credit cards out there that offer a 0% initial interest rate between 12-24 months. You can transfer the balances of the high interest accounts to the no interest card. This will help you pay off the debts much faster and save a lot of money in interest. To qualify for the balance transfer cards you typically need to have at least an average credit rating. If you have bad credit this may not be an option for you.
Pros of a Balance Transfer
- Move high interest debt to a low or no interest card
- Pay off debt faster and cheaper May qualify for 0% interest for a period of 12-24 months
Cons of a Balance Transfer
- Good credit needed for no or low interest rate
- After initial period rate will increase
- Most cards have a max of $10,000
Debt settlement is a process that requires the debt to be charged off. Your credit score will take a significant hit. All of your accounts will be sent to collections and the debt settlement company will contact all of your creditors to negotiate a settlement, usually between 40%-60% of the original balance. You will pay a monthly payment into an escrow account. Terms are either pay in full or stretched out over 12-48 months. If creditors have to wait too long they may sue you. Being in a debt relief program does not mean a creditor will not sue you. Debt settlement may be one of the cheaper options because you only pay back a portion off your debt. However, debt settlement companies charge very high fees and your credit rating will tank. This is a risky alternative to a debt consolidation loan because of the credit impact and the possibility of being sued.
Pros of Debt Settlement
- Pay back a portion of the amount you owe
- Pay no interest P
- Payments can be stretched out for 48 months giving you a low payment
- Credit score is not a factor to qualify for the program
Cons of Debt Settlement
- Will significantly drop your credit score
- Your credit will take several years to recover
- Will not be able to qualify for new types of credit or loans
- High fees, Debt settlement companies charge up to 15% of your balance
- Could be sued by your creditors
Bankruptcy is usually a last resort to getting rid of debt. You will only be able to qualify if you’re in a serious financial hardship and can prove it. A bankruptcy will remain on your credit for a period of 7 years. This is the cheapest option because your debts are discharged in a chapter 7 bankruptcy. However, you will have to hire an attorney. Obviously a bankruptcy will severely damage your credit rating. Your score will plummet initially, you can recover from a bankruptcy after a few years. If you do not qualify for chapter 7, you may be forced into a chapter 13 bankruptcy. You will have to repay all of your debts and will be placed on a repayment plan.
Pros of filing bankruptcy
- Debts may be discharged
- Collection calls and letters stop
- Debt is forgiven in ch 7
Cons of filing bankruptcy
- Student loans cannot be included
- Your credit will take a significant drop
- New credit or loans will not be offered for several years
- Chapter 13 requires you to repay all of your debts
Whether you have a handful of installment loans or a large collection of credit card debt, debt consolidation can help simplify your finances, making it easier to manage your payments. You’ll get the most out of the consolidation process by focusing on your interest rate; the lower the rate, the lower your overall payments. Remember to do your research thoroughly or talk to a certified debt counselor about your options – Accredited Debt Relief or call 1-866-345-5007.