Debt Consolidation Loans For Bad Credit: Causes Of Low Credit Score, And Alternatives To Consolidate Debts

debt settlement and secure loan

It is when a financial institution provides people with money to pay off their outstanding debts and consolidates them.

When people have great difficulty in making their minimum monthly payments, they may need assistance to pay off their debts.

For many debtors, one way to solve this problem is seeking the help of a bank, credit union, or finance company, and apply for a Debt Consolidation Loan.

Such a measure consists of taking out a new loan from a financial institution that brings all debts together. Debtors will have to use the money received to pay off their consolidated debts.

However, when people have a credit score (creditworthiness) below 660, even if they qualify for a Debt Consolidation Loan their interest rates may increase up to 30%.

Causes of Low Credit Score

55% of people’s credit score depends on their credit history. Late payments decrease the overall creditworthiness of any potential borrower.

Not paying credit card bills ensures a low credit score as well. Additionally, unpaid accounts typically get charged off after a few months.

When a creditor perceives no intention of payments on the balances, people’s accounts are at risk of becoming charged off, and such a status can negatively impact the credit score of any person.

Before charging off accounts, some creditors may even sell people’s debts to third-party debt collectors to try to obtain payment from debtors.

Defaulting on a loan affects the credit score in a similarly negative way as having accounts charged off.

Foreclosure, which is the legal process in which a lender seizes and sells a home or property because its buyer can’t fulfill repayment obligations, also harms the credit score of a debtor.

That pretty much entails that the buyer is a high credit risk and cannot keep payments current.

Overall, falling behind on one type of debt can strain the ability to keep up with the rest.

But nothing is more harmful to the credit score of a person than filling a Bankruptcy, which refers to the legal procedure that permits debtors who face insolvency to place their financial issues under the control of a court.

A low credit score increases the interest rate in a Debt Consolidation Loan, which renders null the purpose people have when taking such measures; find a way to pay off debts with the lower interests possible.

That is why several debtors look for other similar but more effective means to deal with their debts, all according to their current financial situation.

Alternatives to consolidate debts

There are several options available for people with a low credit score to consolidate and pay off their debts with a lower interest rate.

If debtors can’t apply for a Debt Consolidation Loan, they may resort to any of the measures listed here below:

Debt Settlement

It is a negotiated agreement between debtors and creditors to pay less than the total amount owed.

This option requires having debts charged off and collected. The debt settlement company chosen by the debtor will contact creditors to negotiate an arrangement between 40% and 60% of the original balance.

Terms may get stretched out between 12 and 48 months. However, if creditors consider the debtors will take too long to pay, they could sue unless they find debtors in a debt relief program.

Getting a cosigner

Even though most lenders don’t offer Debt Consolidation Loans to people with bad credit, some of them may approve a loan if the debtor has a co-applicant with good credit.

In these particular cases, some debtors tend to look for a willing cosigner in their family. All that’s needed is the co-applicant to have a decent credit score and a lender who allows cosigners.

Requesting a loan to a Credit Union

Credit Unions are not-for-profit financial institutions run by a board of volunteer directors focused on helping people to succeed financially.

Sometimes, these institutions may offer Debt Consolidation Loans for people with a low credit score. Such services often feature lower interest rates than the ones a bank usually provide.

Secured Loan

When people own some valuable assets, they may be able to pledge them as collateral (the property used to guarantee the repayment of a loan).

The advantage of this option is the fact it lowers the lenders’ risk, so they may be more willing to provide with a Debt Consolidation Loan.

However, this measure all puts people’s property in a position in which a lender can seize it to settle the person’s debts.