If you are looking to consolidate your debt, you may have thought about debt consolidation loan. Some people with the least amount of knowledge about debt relief quickly think about getting a loan to pay off their multiple accounts to leave them with one debt to deal with. That, is the simplest way to sum up what debt consolidation loan is all about.
However, to get this debt solution to work, you need to guarantee that you get a low interest rate. This will help you achieve a lower monthly payment – which incidentally is the aim of this debt relief program. But to get that lower interest, you need to possess a good credit score. That will show your lenders that you are a low risk borrower and will keep them from imposing a high interest on your loan. That high interest is to protect themselves against the possibility of you defaulting on payments.
But what if you have a bad credit score? Should you throw debt consolidation out the window?
No you don’t.
Stick to debt consolidation loan and use your collateral
One option to use debt consolidation loan is to put your collateral on the line. Your collateral will help you get a secured loan that is known to provide a very low interest rate. The thing about this option is you can combine your mortgage with your unsecured debts. This debt relief option is one of the few that will allow you to do so.
You can use a home equity line of credit or HELOC. This means any equity that you have on your home can be loaned like a second mortgage. You can use that to extend your debt payments on the mortgage and also your credit cards – which is a notorious for their high interest rates. It will help make your total monthly contribution much lower than your old mortgage payment and credit cards.
However, you need to be careful because this can lead to a couple of pitfalls.
You can lose your home if you fail to pay off your loan.
Your newly paid credit cards can prove to be quite a temptation to re-use and that can lead you to acquire more debt.
You can feel a false sense of complacency that is brought about by the convenience of your single payments. This can prompt you to loosen your spending restrictions.
Consolidate debt through peer to peer lending
If you do not have a collateral to use, you can get a loan from peer to peer lending sites. This is a fast rising option for debt consolidation loan because bad credits do not have as much negative effect on the interest rate compared to bank alternatives.
The way it works is you look for a website that hosts peer to peer lending. Here you will find lenders from the community who will finance your loan. Instead of getting loans from banks, individual investors and lenders will lend you your money. In some cases, only one lender will give you the loan amount. In some instances, more than one lender will contribute – especially if the loan amount is high.
Here is the process in peer to peer lending as lifted from Prosper.com (P2P lending company). The other company that you can check out is Lending Club.
The borrower joins the community.
Borrowers fill up the application form.
P2P lending company will review their credit report to give them a risk rating and assign loan terms.
Borrower will post the loan amount they will choose from the customized loan listing complete with the description of the loan’s purpose.
Investors will review the loan listing and invest if they choose.
Borrower receives the loan amount.
Borrower will pay the monthly amount based on the loan terms provided by the P2P lending company. This is usually arranged as an automatic withdrawal from the account of the borrower (all pre-approved before the start of the loan).
Although a good credit score will benefit the borrower in peer to peer lending, those with bad credits will not be too far behind. In essence, it is still better than borrowing from a bank with a bad credit.
Use debt management to consolidate credit
Another way to consolidate your debt with a bad credit score is to opt for debt management. You do not need to possess a collateral nor will your low score matter. All you have to do is to look for a reliable debt management company that will help you restructure your debt payments.
Here is the process that you will have to go through in debt management.
You will enroll your debts in a credit counseling program.
The credit counselor will review your debts and finances.
You will be offered a debt management program if you qualify.
When you opt for debt management, you will create a debt management plan with the credit counselor. The debt management plan will contain the low payment that you can afford to pay every month. The plan will also be stretched longer to allow this low monthly contribution.
The counselor will present the completed debt management plan to the creditors listed to negotiate the new payment scheme.
The counselor will also try to negotiate for a lower interest rate.
Once the plan is approved, you will send a single monthly payment towards the counselor.
The counselor will send the payment to the different creditors.
The downside to this debt solution is it can be selective of the debts that you can enroll in it. For instance, they will not accept secured or student loans. But if you merely want to consolidate your credit card debt, then this is the right option for you.
The best thing about debt management is, it will not ruin your credit score even further. Not only that, as you stick to your payment plan, you will help improve your credit score too.