If you’re looking for options to pay off your debts and get back on track financially, you may have come across debt consolidation loans as a way to manage your debt repayments more easily.
But what if you have bad credit? You may be wondering if this will affect your chances of being approved. Read on to discover how a debt consolidation loan can still be an option, even if you have bad credit.
How a debt consolidation loan can help you pay off debt
A debt consolidation loan is a form of refinancing. You apply for a larger debt to pay off multiple other loans and debts, with the goal of paying a lower interest rate, a lower monthly repayment amount, or both. When your debts are streamlined into a single loan, you only need to make one monthly repayment, and you are only dealing with one lender.
There are two main types of debt consolidation loans: secured and unsecured. With a secured loan, you give the lender “security” for the amount of money borrowed, by putting up a large asset (most commonly your home) as collateral.
This means that if you are unable to meet your loan repayments, the lender can seize your asset to recoup their losses. Having collateral lowers the risk undertaken by the lender, which in turn means they are more likely to offer you a better interest rate.
But what if you don’t own your home? The premise of the debt consolidation loan remains the same, that you take out a bigger loan to repay all of your other various lenders.
However, as you are not putting up any collateral, the lender is taking a larger risk in lending you money. Therefore, you are likely going to have a higher interest rate.
Bad credit and applying for another loan
It is possible that with seriously bad credit, an application for a debt consolidation loan may be refused, though it is more likely that you will be approved. However, the terms of the loan may differ, and you may not have the same choice of lenders.
Regardless of your credit rating, the low risk nature of a secured loan means that you should still be offered a decent interest rate. Unfortunately, the same can’t be said for an unsecured loan, so if you apply for this with bad credit, you will likely have a high interest rate.
Traditional banks may be more conservative in their approach to approving loan applications, so you may want to explore other lending options such as credit unions and debt consolidation lenders.
How to improve your chances of being approved for a debt consolidation loan
Before applying for a debt consolidation loan, it’s savvy to have a fair idea as to whether you will be approved. This will save you time and effort, as well as the potential negative impact a declined credit application will have on your credit rating.
To do this, you should make a clear list of the debts you owe, including the lenders, the amount owed and the interest rates of each debt.
Seek financial advice and speak to a range of lenders to find the best loan for your situation.
Finally, work on improving your credit score for both your loan application and long term financial health.