Please Don’t Use Debt Consolidation Loans For Bad Credit

Debt consolidation for people with bad credit can be a really bad idea. If the amount of the loans can be consolidated with a lower interest rate than the average of all the loans and the fees and terms aren’t terrible. However, most debt consolidation loans for bad credit borrowers are extremely high interest and have very high fees and terrible terms. Banks issue credit based upon the FICO score of the borrower, among other things, and if that score is low the getting a low interest rate loan are unlikely. The object of debt consolidation is to relieve the burden of high interest debts, but it isn’t usually feasible for borrowers with bad credit.

Debt consolidation loan with bad credit is essentially like putting all your loans on a credit card. The interest rates will vary, but most will be around 20-25%, depending on how bad the credit rating of the borrower is. I highly doubt it would be beneficial to consolidate all of your debts under a 20-25% APR (annual percentage rate). Instead of debt consolidation for bad credit, a better option is repairing your credit enough to consolidate your loans under a low interest rate loan.

Repairing credit isn’t easy for everyone. Some people have bad credit marks because they were late on a few payments. Others defaulted on a loan because of the loss of a job, or mounting medical bills. Even more people don’t realize they have bad credit because of their debt to income ratio and not due to any past due debts. Debt to income ratio, or DTI, is the recurring debt you have monthly divided by the monthly gross income multiplied by 100. If the resulting percentage is higher than 36%, it’s too high for a good interest rate.

A defaulted loan can stay on your credit report for 7 years, but if you can show you can make payments on time, you can rebuild your credit. Using a secured card and paying it off every month for a year will go a long way to showing creditors you’re not as risky. If you’ve had late or past due payments, the secured card can help immensely.

Debt consolidation for bad credit is sold as a positive thing, however, for 90% of people with bad credit it’s a terrible idea. It can destroy credit even further by locking borrowers into a long term loan with high interest and a penalty for early payment. While having one payment may seem easier, having a long term loan with high interest will cause undue hardship. The best option is to wait until credit is repaired or slowly pay off one debt at a time. Make your highest payments on the debts that can be paid off the quickest. Reduce your overall debt and you’ll have no trouble getting a debt consolidation loan with good credit at a good interest rate.

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