Debt Consolidation

How to Consolidate Debt with Bad Credit in 12 Steps

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Most likely, while watching TV or going through your mail, you’ve come across ads of companies that want to help you consolidate your loans to lower your interest rates, cut your repayments in half and help you get out of debt once and for all.

To consolidate your high interest loans and credit card debt into just one loan that has lower interest rate and more manageable payments sounds quite reasonable. However, things don’t always go that way as many people who are consolidating their loans end up paying even more than they would have in the first place.

That’s dangerous especially in the case of home equity loans as a troubling number of borrowers end up losing their homes. Not to mention the fact that many of those so-called “consolidation” programs are not actually consolidation loans at all. So it’s no surprise that debt consolidation has a bad reputation as it really should. There’s still the possibility of benefiting from consolidation, that is, if you proceed with caution and explore all your options.

We’ll go through 12 steps which explain the process of consolidating your loans, what to do and what not to.

1.  Get your FICO score and credit report

Get your FICO score and credit report

Usually, almost any loan you get will, in most parts, be based on your credit score, so it’s good to know what your credit score. If your credit score turns out to be quite good and has improved since you got your loans, it may be easier for you to consolidate loans at a lower rate.

  • Inaccuracies can hurt your score and keep you from getting the rate you really deserve. So carefully go over your entire credit report to make sure that everything is accurate.

2. Consider all your options

Before going for a debt consolidation loan, you should evaluate your other options:

  • Say, you just want to save money or pay off your debts fast, by prioritizing them will let you do that. Pay on your highest-rate loan as much as you can each month, while making minimum payments on the others. That way, you’re able to lower your monthly finance charges as quickly as possible.
  • Give your credit card company a call. If your credit is relatively good, you may be able to just talk to your credit card company and negotiate for a lower interest rate. If they refuse to give you a lower rate, you can transfer your balance to a credit card with a lower long-term rate or to a one with a no-interest introductory rate. Just make sure that you’re certain what your rate will be after the introductory period.
  • Consider all your options - bad credit debt consolidationTry contacting a credit counseling agency. A good credit counseling agency can provide you with free or low-cost advice on how to better manage your debt and they can help you get your finances back in order.
  • However, credit counseling does not necessarily mean going into a debt management program. You should stay away from any organization that tries to push you into such a program immediately. All in all, you should be careful when you’re choosing a credit counseling agency. Even agencies that are registered as non-profits can often charge high fees.
  • Sell your automobile. If you can’t afford your car repayments, try to sell it so that you can pay off the loan. If the car gets repossessed, it could end up costing you even more money.
  • Speak with your mortgage lender. Mortgage lenders will normally work with you if you have some temporary trouble with paying. Call them as soon as you know you’ll have trouble with your repayments and they may temporarily suspend or accept reduced payments. You may also be able to extend the time for your repayment, thereby reducing your monthly payments. Or you might pay interest only, reducing the payment amount for a time. Make sure you are informed of any additional fees or penalties for any arrangement and consider refinancing your home if you can get a better interest rate.
  • Borrow from your life insurance. Whole life policies normally allow you to borrow against the cash value of the policy. This easy, normally low-interest loan can get you quick money to pay off current debts. Make sure you check on the tax implications of borrowing and understand that if you don’t repay the loan, it will be subtracted from the amount your beneficiary receives.

3. Understand the difference between a consolidation loan, debt negotiation and debt management program

Understand the difference - bad credit debt consolidation

Companies that claim they’re able to help you lower your payments or get you out of your debt quickly may seem like they’re offering consolidation loans. They might even have the word “consolidation” in their names, when in reality what they use are methods such as settlement, debt management or even bankruptcy. There are big differences between these options:

  • A consolidation loan is basically a loan that pays off your other loans. Once you’ve consolidated a loan, you owe that money to the new lender and not to the original creditor. A consolidation loan might lower your monthly payments by either reducing your interest rate or extending the length of time for your repayment. Ultimately, it pays off the other creditors completely. Consolidation loans may temporarily sully your credit, but usually nowhere near the extent of debt management programs or debt negotiations.
  • Debt management programs can also reduce your payments, but they work in a different way. Acting as a middleman between you and your creditors, a debt management agency tries to negotiate a reduction in the interest rates or fees on your loans. After that, you pay an agreed amount to the debt management agency or credit counseling agency, and they disburse the payment to your creditors. Participation in a debt management plan normally shows up on your credit report which might adversely affect your credit rating.
  • The act of settling a debt for less than what you owe is what debt negotiation is. You have to pay a part of what you owe to a creditor and then the creditor writes off the rest of your debt. As a way to recoup part of their losses, credit card companies usually offer lump-sum settlements. Though you may end up owing less, a settlement will badly bruise your credit score. Even worse, third-party companies that offer debt negotiation have been known to often disguise their practices as consolidation, and the same companies often charge enormous fees while basically passing along payments to your original creditors, sometimes even failing to negotiate any difference in your repayment terms.

4. Try paying off your debt as quickly as you can

Try paying off your debt as quickly as you can

One of the consolidation loans most attractive features is the possibility of lowering monthly payments. If reducing your payment is just a result of spreading your repayment over a longer period of time, it’s quite possible you’ll be paying more, sometimes even far more with the consolidation than you would have without it. Go through your budget and figure out a way to set your monthly payment as high as you safely can. That way, you’ll end up paying less and get out of debt much faster.

5. Choose the right loan for yourself

Debt consolidation loans can be two types-secured or unsecured:

  • Secured loans, such as secured lines of credit, second mortgages, or home equity loans, will normally have lower interest rates than unsecured ones. That’s because if the borrower defaults on the loan, the lending company can recoup the money by selling the asset. Interest on a home equity loan can also be tax-deductible, a feature that can save you more money. However, the lender can foreclose on your house if you fall behind on a home equity loan.Before opting for any secured loan, you must carefully consider the risks that come with it. Should also keep in mind that loans such these may include hidden fees that may drive up the cost of your loan.
  • Unsecured loans seem like a safer option since you don’t have to risk your house or other assets. If your credit is good, you should be able to get more than a decent rate on an unsecured personal loan. However, depending on the situation you’re in, especially if your credit is bad, you might find that only a secured loan will get you a lower rate than what you’re already paying.

6. Look around

compare the terms and interest rates

Carefully compare the terms and interest rates of different loan lenders. Often, your best bet is your own bank or credit union, especially for personal loans. However, it’s always a good idea to look around.

  • It’s best that you get quotes in writing so that you can compare lenders side-by-side. Also, there are websites that allow you to compare several different lenders.
  • Make sure that you really understand all the fees that are associated with the loans as well as the conditions of the loan. You will only get a solid price for the loan if you actually apply for it as the final interest and fees may vary a lot from those quoted. Get a quote as accurately as possible by providing only accurate information.

7. Compare your total cost to other consolidation loans

Pay attention to more than just the monthly payment because that’s how consolidation companies lure you in. Even with the lower payments, you might still end up paying a lot more for the consolidation. Instead, think how much you’ll actually pay for a consolidation loan, including the upfront and recurring fees, interest, closing costs and points and any tax implications over the life of each of the loans. Choose the best option and then compare it to the total amount that you’ll have to pay to pay off your current loans. If you can get substantial savings on the total cost of the loan, consolidation is probably a pretty good option.

8. Read your loan contract carefully

Read your loan contract carefully
Read your loan contract carefully

Read carefully every word, and then do it again. Ask as many questions as you may think of, and make sure you understand the answers given to you, regardless of how many times you have to ask. If you have any doubts, get a lawyer or another knowledgeable and independent source to take a look at the documents for you. Something that seems inconsequential in a contract can easily end up costing you thousands of dollars or even your home, so take it seriously.

9. Do not accept credit insurance

Some lenders might make attempts to pressure you into buying credit insurance either by implying that your application will be rejected, extolling its virtues or hiding it from you. If a lender does any of these actions, don’t hesitate to file a complaint with the appropriate authorities. Credit insurance can add a huge cost to the loan and it usually doesn’t really offer much protection. The lender can make the cost seem small by telling you the monthly price, but don’t let yourself be fooled.

10. Finalize the loan

If your loan hasn’t been approved yet, complete the full application process. This should be pretty straightforward, but it can still take some time. If your loan rate differs from the one which you has been quoted for, find out why and check your next best option. Don’t be tricked by the old bait and switch.

Control your spending

11. Control your spending

If you’re looking to consolidate because you’ve gotten in debt over your head, it’s time to take a good look at your budget and balance it so that you don’t continue to dig yourself in.

12. Use what you’ve learned to your advantage

You can consolidate debts in many ways, but some strategies carry greater risk than others. There is often a trade-off between the amount of risk and liability that you carry and the terms of the consolidation. By having the needed information, you can make the best choices for yourself and financial stability.


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