Debt Consolidation Loans For Very Poor Credit

No one wants to have poor credit but sometimes circumstances arise that make repayment of debts impossible. Others simply were not responsible enough with their debts and ended up with poor credit. Almost always poor credit is exacerbated by the amount of outstanding debt and the inability to meet monthly payments to all creditors at the end of the month. In this circumstance, a Debt Consolidation Loan can be very helpful from “climbing out of the hole”.

Let us explore what is a Debt Consolidation Loan and why it can be beneficial. We will then look at what options are available for those with very poor credit.

What Is A Debt Consolidation Loan

Debt consolidation is a process undertaken by a borrower who has several unsecured debts and loans, hopefully this will lead to easier payments and possibly even reduce the interest paid across all debts. The borrower takes out a loan that is used to pay all their creditors, leaving them with one monthly payment.

Take someone who owes $20,000 across Credit Cards, car loans, and payday loans. A consolidation loan would be used to pay off all these creditors leaving the individual with a single, consolidated payment.

View Best Debt Consolidation Loans For Very Poor Credit

Benefits Of Consolidation Loans

The most apparent benefit of a Debt Consolidation Loan is the ease of having to make only one payment per month instead of several. Another major benefit is the ability to decrease one’s debt to income ratio. By choosing the right term, and paying off the debts over a longer period, it affords the debtor the luxury of putting less of their monthly income towards their debts. Even if the increased term means one pays more in interest over time it may still be desirable to those who have an extremely high Debt to Income Ratio.

How Does Credit Score Affect The Loan Offer

Low or bad credit score equals fewer loan options and higher interest rate, in opposite to if you have a good credit. But there is no reason to panic, there is plenty of options today even if you have a lower score.

  • 550 and above: Using the pre-approval process for personal loans is the best option here as the pre-approval process utilizes a soft credit check, thus not hurting ones credit score.
  • 480-550: Scores are lower than what most lenders would like to see, but some may still lend to individuals, especially those with a low debt to income ratio. Once again, using the pre-approval process allows one to view what options they have.
  • 480 and lower: Scores in this range are unlikely to be eligible for a loan, although lenders requirements do vary. Once again, see what pre-approval has to offer but improving one’s credit score is likely to best course of action here.

The issue many people with very poor credit will face is the inability to qualify for anything other than small amounts. One can try and secure several smaller loans but it eventually leads back to the same issue; many different loan debts to pay at the end of the month.

In this scenario, there is likely to be any option other than improving one’s credit score. While there is no quick fix there are some simple steps one can take towards improving their credit score. For some people, even a slight improvement can mean the difference between getting a consolidation loan and not.

Options For Bad Those With Very Poor Credit

Lowering Credit Utilization Ratio
Payment history is not the sole determining factor a lender looks at when deciding whether to approve a loan or not. A critical component lenders look at is the Credit Utilization Ratio. Simply put, how much of one’s credit do they use? For example, say someone has a credit card with a limit of $1000 and a balance of $750. This is their only debt. This person’s credit utilization ratio would be 75% since they have used 75% of their available credit.

Lowering one’s Credit Utilization ratio can be as simple paying down balances if possible. Another solution, for those who qualify, is applying for another credit card and maintaining the balance at $0. This new credit card will increase the amount of credit extended and, if the individual is disciplined and keeps a $0 balance, it will cause a decrease in their credit utilization score.

Most lenders like to see a credit utilization ratio of at most 30%, but different lenders have different tolerances.

Lower Income to Debt (DTI) Ratio
The less of one’s monthly income is devoted to servicing debts the more likely it will be that a creditor will lend to someone.

Consider Balance Transfers For High-Interest Credit Cards
Many companies can offer a no interest period. The time span for no interest period can very from three to six months. With some clever use of this periods you can make sure that the hole payment goes towards the principal and not interest.

Applying To More Than One Lender
Lending requirements vary greatly from one lender to another. Those with bad credit should apply to many different lenders to see what is offered. The lenders will only, initially, perform a soft credit check, so it will not have an affect on ones credit score.

Split Loan Into Multiple Loans
The lower the credit score the less likely it will be to secure a large sum of money. In this case, splitting the loan up into 2 smaller loans could be helpful.

A lender might not feel comfortable lending someone with bad credit $10,000, but more comfortable lending them $5000.

How Much Can One Expect To Borrow
Lenders like to see that your total debts be at most 200% of your yearly gross income. A person earning $35,000 per year before taxes can comfortably borrow $70,000 assuming that other lending criteria is met.

The Debt Snowball Method
A common debt reduction technique. The individual pays the minimum required payment on all debts except for the one with the smallest balance. All remaining income for debt servicing is then directed at the debt with the smallest balance.

The Debt Avalanche Method
The reverse of the debt snowball. The debt with the highest balance is targeted first, with the other debts only getting the minimum payment.

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