Using Loans to Pay Off Debt (with Bad Credit) 2020 Guide
How to Get a Debt Consolidation Loan with Bad Credit
The type of loan you need to pay off your debt will depend mostly on the type of debt you carry on. Each type of loan has its own requirements, restrictions, and associated costs — and that’s before you factor in the challenges associated with having bad credit.
If your FICO® credit score is below then 580, managing your finances with debt consolidation might be difficult. But if you have “fair” or better credit score and can get approved for a debt consolidation loan, it can be an easy way to lower your monthly payments, reduce the number of creditors you owe and shorten the time it takes to pay off your debt.
Yur Debt consolidation is a method of taking out a new loan to pay off the high-interest debt in an effort to streamline monthly payments and save money over time.The Peoples typically use personal loans, low-interest credit card balance transfers, or debt management plans to consolidate their debt.
Using Personal Loans to Pay Off Debt
Personal loans are a flexible form of financing that can be used for just about anything (so long as it’s legal), including paying off a wide variety of debts. Most commonly, however, personal installment loans are used to pay off and consolidate high-interest credit card debt with the goal of streamlining payments and reducing interest.
Personal Installment Loan Providers
For the most part, finding a personal loan isn’t that hard; most banks and credit unions will provide personal loans, as will hundreds of online lenders. The process gets more complicated when you have bad credit, however, particularly if you need a fairly large loan to consolidate multiple debts.
Local credit unions are often a good place to find an affordable personal loan, and credit unions often have flexible credit requirements. Online lending networks can also be an easy way to find lenders that aren’t afraid of a low credit score. Our expert-reviewed networks below have wide partner networks that can help borrowers with nearly any credit type.
- Loans from $500 to $35,000
- All credit types welcome
- Large lender network
- Available in all 50 states
- Use the loan for any purpose
- Fast loan decision and funding (as soon as 1 business day)
Remember that online lending networks are just a place to meet your lender; the network won’t be handling your final loan agreement or financing your loan. Furthermore, if you have any issues with your loan, you’ll need to speak directly with your lender, as the network can’t help you.
How It Works
When you are approved for a personal loan and accept the terms, the funds you borrow will be dispersed into your bank account. At this point, you can use those funds as you would any other to pay off your credit cards or other high-interest debt. You’ll then make loan payments each month to pay off your personal loan.
Ideally, the consolidation loan will be your only remaining debt — and you’ll stop accumulating more debt. The other key to successfully using personal loans to pay off your high-interest debt is to get a loan with a lower interest rate than the rates you’re currently being charged.
Of course, if you are struggling to make your monthly payments, even a loan with a less-than-ideal rate may help. Card cards continually accrue more interest so long as you carry a balance, and the minimum required payment is based on your balance.
Installment loans, on the other hand, have set monthly payments, and you’ll know your interest charges up front. Plus, you can control the size of your monthly payment by selecting the length of your repayment term. The longer you take to repay the loan, the lower your monthly payment will be — though the more you’ll pay in interest fees over time, so balance the two factors carefully.
Using Home Equity Loans to Pay Off Debt
One of the top reasons many people have for buying a home is the notion that buying a house is an investment. While the true value of that investment will vary based on housing trends, as you pay down your mortgage and/or housing prices increase, you’re building equity in your home — equity you may be able to tap into to help pay off debt.
Home Equity Loan Providers
Many lenders that offer mortgage loans will also provide home equity loans or credit lines, and you don’t have to get your home equity loan from the same lender that handles your primary mortgage loan. At the same time, while home equity loans don’t typically require a down payment, they may still involve a credit check.
Moreover, bad credit can still be a liability when applying for a home equity loan — no matter how much equity you have — so choosing a lender will come down to both the type of loan you want (loan vs. credit line vs. cash-out refinance) as well as your personal qualifications. Online lending networks, like those below, can be a good way to connect with multiple lenders to get an idea of your options.
- Options for: home purchase, refinance, home equity, and reverse mortgage
- Lenders compete for your business
- Receive up to 5 offers in minutes, and pick the best offer for you
- Founded in 1996, LendingTree has facilitated 55 million+ loan requests and $250 billion+ in closed loan transactions
Quicken Loans® Home Loans
- Options for: home purchase, refinance, cash-out, and debt consolidation
- The nation’s largest online lender
- Allows applicants to buy a home with a minimal down payment (as little as 3.5% down)
- In some cases, down payment can be a gift from a relative or nonprofit organization
- Get pre-approved for free – before you shop for your new home – and get more bargaining power
- Avoid paying Private Mortgage Insurance with PMI Advantage program
FHA Rate Guide
- Options for: refinance only
- Get 4 free refinance quotes in 30 seconds
- Network of lenders compete for your loan
- Trusted by 2 million+ home loan borrowers to date
- Interest rates are near all-time lows
When it comes to home loans, the nature of your bad credit will have just as much to do with qualifying as your score itself. A so-so credit score can sometimes be overlooked if your debt-to-income ratio (how much you owe over how much you make) is low and if you have at least a year of positive payment history.
How It Works
There are three main ways to get cash out of your home’s equity that can be used to pay off debt: a home equity loan, a home equity line of credit, and a cash-out refinance loan. All three methods will typically require a credit check and a home appraisal to gauge the value of your property.
A home equity loan — sometimes called a second mortgage — is a one-time loan that uses the equity in your home as collateral for the loan so that you don’t need to make a down payment of any kind. Home equity loans usually have a set repayment term, and the contract ends when you pay off the loan.
In contrast, a home equity line of credit (HELOC) is effectively like a home equity loan that you can use over and over again. The HELOCs still depend on your home’s equity for collateral, but instead of ending when the amount is repaid, The HELOCs are revolving credit lines, similar to credit cards.
The both types of home equity credit lines will be limited by the actual equity you have in your home income, or the loan-to-value (LTV) ratio. For example, if Livia’s home is worth $200,000 and she owes $100,000 on her home mortgage loan, then her LTV is $100,000 / $200,000 = 0.50 = 50%.
The amount you can borrow will typically be capped at some LTV level with which the lender feels comfortable; an LTV of 0.85/85% is fairly common. So, continuing with Edna’s example, 85% of $200,000 is $170,000. When you subtract what she already owes, Edna could potentially qualify for a home equity loan of up to $170,000 – $100,000 = $70,000.
Depending on your credit and equity levels, another option for getting money out of your home may be a cash-out refinance loan. Sort of a mix of a home equity loan and a refinance loan, a cash-out refinance loan allows you to refinance your home mortgage for more than you currently owe and take out the difference as cash.
Similar to home equity loans, cash-out refinance loans will cap how much of your equity you can tap, and you’ll never be able to refinance for more than your home is worth. In Edna’s case, if she owes $100,000 on her mortgage, she could take out a cash-out refinance loan for, say, $150,000, and use the extra $50,000 to pay off debt or make home improvements.
The downside to a cash-out refinance loan is that you are taking on a larger loan than you need to pay off your original mortgage, which means you’re effectively extending your mortgage payments — and your interest payments. As a result, you’ll likely not only be taking years longer to pay off your home, but you’ll also have paid way more in interest by the time you’re done.
And, of course,you need a be careful using your home as collateral for any type of financial contract. If you fall behind or fail to repay a loan secured by your home, you could wind up losing your home. Only take out home-equity based loans if you are absolutely certain you can make the payments as required.
Consolidating Debt with Bad or Average Credit 2020
The FICO® Credit Score, which ranges between 300 and 850, is the most commonly-used credit scoring model by lenders for evaluating a borrower’s creditworthiness and has several ranges. Credit scores above 670 Up are considered good, very good or exceptiona okl depending on the score. A “fair” score ranges from 580 to 669 and any score that is lower than 579 is considered “poor.” Knowing your credit score is important in determining your options, but even with less than perfect credit score , there are still ways you can consolidate your debt on time.
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