If you have a lousy credit score, chances are you already carry high-interest debt. Your ability to obtain a debt consolidation loan at a reasonable rate when you have bad credit is severely compromised. You do, however, have other solutions that can help meet your debt consolidation objectives of consolidating your bills, lowering your monthly payment, and improving your cash flow so you can get out of debt sooner.
We look at the two best alternatives for people looking to consolidate debt when they have bad credit:
- getting a debt consolidation loan,
- filing a consumer proposal;
As well as a review of the credit score implications of each option.
Should you even get a bad credit debt consolidation loan?
A debt consolidation loan can be a good way to pay down your debt, but only if you can get a loan with a low interest rate. If you have a history of missed payments, maxing out credit cards and relying on short-term loans to pay your bills, then a bad credit debt consolidation loan may not be the fix you need. If you have a low credit score, your existing bank is likely unwilling to help you, which means approaching alternative lending sources.
Can you get a debt consolidation loan with bad credit? Yes, some companies will provide unsecured consolidation loans no matter your credit rating, however, the worse your credit history, the higher the cost. Borrowell advertises that their average interest rate is around 11-12%. However, this means many of their customers with poor credit are paying rates that are much higher than that.
Here are 4 questions you should ask yourself before taking out a consolidation loan to pay off debt when you have a low credit score:
- How much interest will I save?
- What additional fees will I be charged?
- Can I afford the monthly payments?
- What are the extra costs and fees if I miss any payments?
A debt consolidation loan may seem like the best fix, but it may not be. It’s important to remember that a bad credit debt consolidation loan is still a loan and lenders seek to profit from this product. Most of your monthly payments will still be going towards the high interest on your loan, extending your repayment period for many, many years and delaying your financial recovery.
Typical Loan Consolidation Example
You owe $20,000 on multiple credit cards and several outstanding bills that you want to consolidate. You find a loan provider willing to loan you $20,000 at 17% interest. What would your monthly payments be?
– If you pay this loan off over 3 years, your payment would be $713 a month, plus any up-front fees.
– You could extend your repayment to 5 years, and this would lower your payment to $497 a month.
You should ask yourself:
- how consistent is my income?
- Could I budget $500 per month for 5 years to pay off this loan?
- What would happen if I lost my job, do I have enough emergency savings to maintain my living and debt expenses?
Answering these questions honestly will help you determine whether bad credit consolidation loans are worth it.
If you can’t afford the monthly payment, then it’s time to consider a less expensive alternative if you are looking for bad credit debt help.
Consider options that lead to debt relief
When you settle for expensive debt consolidation, you end up accomplishing the opposite of what you intend: debt relief. Why? Because you are not eliminating the debt you owe, you’re simply replacing it with new debt.
The good news is you can get out of debt with bad credit, without relying on a new loan. It may be better for you to file a consumer proposal with a Licensed Insolvency Trustee. Rather than replacing your existing debt with more debt, a consumer proposal allows you to eliminate your debt obligations altogether.
Why is a consumer proposal better than a consolidation loan for most people with poor credit?
- You pay less than you owe, resulting in much lower monthly payments.
- A proposal is a negotiated arrangement, ensuring that your payments work with your budget.
- Payments under a consumer proposal are interest-free.
A consumer proposal is a good option if you do not qualify for a debt consolidation loan because of your poor credit history or if rate offered is too high.
Typical Consumer Proposal Consolidation Example
You make a deal to settle $20,000 in credit card and other debts for $7,000. Based on your income and assets, your creditors agree to those terms.
– If you choose a 3-year proposal payment plan, your monthly payments would be $195.
– A proposal can be paid off over a maximum of 5 years, lowering your monthly payment to $117.
A consumer proposal can consolidate most types of unsecured debt including credit card debt, payday loan debt, income tax debt, lines of credit, and personal loans. You do not need to worry about whether you can borrow enough to deal with all these debts. They are automatically included in the deal.
But what about improving my credit score?
One of the most common reasons people insist on searching endlessly for a low rate consolidation loan for bad credit is because they do not want to hurt their credit any further. Many people are enticed by lending companies that offer to ‘level up’ your loan. Loan companies use a lot of terms: level up, lend up, ladder up. They all mean the same thing.
How do you level up a loan?
Make your payments for a specified period of time, usually at least 12 months, and the lender will either increase your credit limit or offer you a lower rate loan.
The thing is, to qualify for this rate improvement you must have a stable credit profile. That means no other hits to your credit report. No new loans, no re-drawing on your credit cards if this keeps your debt load high. And offering to increase your credit limit, when you are already struggling to repay your debt, is not a good deal for you.
The truth is that your credit score can improve quicker with a consumer proposal.
Why? Because no more debt is the fastest way to rebuilding credit.
With a proposal, your monthly payments are much lower, which improves your overall cash flow. Since you now have a balanced budget, you can begin to set aside some savings. At the end of the proposal, all your debts are eliminated. You start from zero, a clean slate.
Any credit impact of the proposal is removed from your credit report 3 years after you complete your payments.
A debt consolidation loan may be reported on your credit report, however, you still have debt, and if you run up your credit cards again, your credit report is no healthier.
What to do when you need debt help with bad credit
If you are struggling with finding a low-cost debt consolidation loan because you have bad credit, and want a solution that will reduce your debt sooner, talk with a Licensed Insolvency Trustee. We provide free, no-obligation consultations that can help you decide what approach is right for you. We will run the numbers, based on your personal financial situation, and help you compare a consumer proposal with a debt consolidation loan to see which program can achieve your debt consolidation goals and get you started on repairing your bad credit, all while eliminating your debt.