Can I Consolidate My Debts If I Have A Bad Credit Rating?
Debt Articles > Article: Can I Consolidate My Debts If I Have A Bad Credit Rating?There is a common misconception that borrowers with bad credit will not qualify for debt consolidation loans. Fortunately, this myth couldn't be further from the truth. While borrowers with less than perfect credit may receive less attractive rates and terms than borrowers with outstanding credit ratings, there are many programs available to help borrowers qualify for debt consolidation loans, even if they have bad credit or no credit at all.
Consolidating your debts can be an excellent way to simplify your finances and become debt free more quickly. If you are overwhelmed by unsecured debt (such as credit card debt or other unsecured loans), consolidating these unsecured financial obligations has many benefits, including saving you thousands of dollars in the long-term, reducing your total monthly payments, helping you become debt free faster, and improving your credit rating. Unfortunately, many people who would benefit from this type of consolidation believe that they are not eligible for these programs because they have less than perfect credit.
Good Credit versus Bad Credit
A person's credit score is certainly important when determining whether he or she is eligible for a consolidation loan; however, a bad credit score will not necessarily rule a borrower out. Borrowers with bad credit simply have fewer options than those with good credit ratings. Those borrowers with perfect credit files will be able to obtain more attractive loan options, including more favorable interest rates and loan terms. Borrowers with excellent or good credit may also be able to consolidate their debts with an unsecured loan, versus a secured loan that is backed by collateral such as their car or home.
A borrower with less than perfect credit, on other hand, will have to pay higher interest rates on their loans. They will also face greater scrutiny from lenders, and may be required to submit more documentation to verify their ability to repay the new debts. Furthermore, the debts being consolidated will most likely require the borrower to take out a secured loan, such as a second mortgage on their home, or to access a line of credit home loan, both of which require that the borrower have enough equity in their home to cover the cost of the unsecured debt they wish to consolidate.
Any borrower considering consolidating their debts through their mortgage must understand the risks associated with turning unsecured debt into secured debt. Consolidating debts into your mortgage will increase the amount you owe on your home, leaving you with less equity. More importantly, if you default on your mortgage, the lender can foreclose on your home.
Even though rolling unsecured debt into secured debt such as a mortgage has risks, there are still reasons for borrowers with less than perfect credit to consider debt consolidation.
For example:
- Secured loans, such as mortgages, generally come with better interest rates than unsecured debts because secured debts provide the lender with collateral.
- Consolidating your unsecured debts into a mortgage gives you a longer period of time to repay the debt, which will reduce the amount of your monthly payments. (Note: a longer repayment period will also increase the amount of interest you pay over the life of the loan)
- Secured loans are often the only option for those borrowers with bad or no credit, and are still a better alternative to paying steep interest rates on the unsecured debts.
Not all lenders will be willing to work with borrowers who have a bad credit rating; however, a bad credit rating should not prevent you from being able to consolidate your debts. First, research the options available to you, including secured and unsecured debt consolidation loans. Next, you should carefully calculate the monthly and total costs of each option to determine the best strategy for you. Will consolidating your debts reduce your monthly payments? Will debt consolidation decrease the amount of time it takes you to repay your debts? How long would it take you to repay the debt at your current rate of repayment?
Once you've assessed whether consolidation is appropriate for your situation, compare offers from a variety of lenders to secure the best loan rates and terms. Even though borrowers with bad credit will receive fewer offers, it's still smart to shop around for the best loan terms. Finally, assess your money management abilities. Consolidating unsecured debt into your mortgage is only an effective solution if you have addressed the spending issues that caused your financial issues to begin with. If your high unsecured debts were a result of spending beyond your means, you must adjust your budget to prevent yourself from landing in the same situation in the future.
