Although your credit score may not seem like a huge part of your daily life, this number has a lot of power over your personal finances. In particular, your credit rating can determine whether or not you qualify for certain loans and lines of credit — not to mention the terms you’re able to earn on those accounts.
The fact of the matter is that about one-fifth of Americans have what’s considered a subprime credit score of 600 or below. And more than 16 percent of U.S. consumers have a delinquency of 90 days or longer on a credit account, something that can bring down a credit score further. In fact, debt and low credit can form a sort of vicious cycle. Carrying a lot of debt and falling behind on payments can negatively affect credit score, while having poor credit can make it harder to qualify for debt solutions.
There are options available for people with bad credit, like debt consolidation. This strategy involves taking out a debt consolidation loan and using it to pay down other debts with high interests, like outstanding credit card balances. It tends to make the repayment process simpler because you only have to worry about making one payment a month on the loan as opposed to staying current on a handful of debts spread out across different creditors.
But should you take out loans with bad credit? Let’s look at some of the potential pros and cons.
Getting a Debt Consolidation Loan with Low Credit
The good news? It is possible to qualify for debt consolidation loans with bad credit. The bad news? It may be more challenging to qualify — certain lenders will only work with consumers above a certain score — and you will likely end up paying more in interest.
First though, let’s talk about what you’ll need to get a consolidation loan with poor credit. Besides your credit rating, lenders will want to look at:
- Your income: Can you show you have enough steady income to repay the loan?
- Financial health: Can you show the lender you’re not too much of a financial risk?
- Debt-to-income ratio: Is your debt level reasonable in relation to your income?
- Collateral: If necessary, do you have assets (like home equity) to offer as collateral on the loan?
Lenders will consider your credit rating in conjunction with these other factors when deciding whether or not to approve you for a consolidation loan. They’ll also use these areas to determine what interest rate to offer you on any loan they do approve; the riskier you appear to lenders, the more they will expect you to pay in interest.
Risks of Taking Out a Loan with Bad Credit
If it turns out you are able to qualify for a loan through a credit union or online lender, should you move full steam ahead? Not necessarily. First, you’ll need to carefully evaluate the terms to make sure taking out the loan is worthwhile. If you’ll end up paying significantly more in interest over the life of the loan because you can only qualify for one with very high interest, it’s unlikely consolidation is the best option given your circumstances.
And, of course, it’s especially important to protect yourself against predatory lenders looking to take advantage of consumers with bad credit. Always double-check the terms of the and the reputation of the lender before signing. An astronomically high annual percentage rate (APR) is a red flag.
Only you can decide whether you should take out a loan with bad credit. Be aware you’ll likely pay more in interest if you do.