A debt consolidation loan can help you get out of credit card debt. But if you don’t qualify for a decent rate, you should be wary of guaranteed loan offers that sound too good to be true.
How Debt Consolidation Loans Work
Debt consolidation loans work by rolling all of your debts into one loan at a lower interest rate. Lowering your interest rate on your loans could end up saving you money in the long run. However, in order to get a lower interest rate, you will need a good credit score, acceptable debt to income ratio, and consistent income history.
Consolidating your debt can be helpful by streamlining all of your monthly debt payments into one monthly payment. No more keeping up with multiple payments!
Loans to Avoid
Some consolidation loans may sound helpful but actually do more harm than good. Be careful to avoid consolidation loans that sound tempting without doing your due diligence, including:
Pay Day Loans
While the lender is required to be up front with you about the cost of a pay day loan, these loans may not be as beneficial to you as you may think. To get a pay day loan, most lenders expect the borrowers to write a check for the amount of the loan plus a fee. When you are paid, the lender will cash your check or you can extend your loan for an additional fee.
Car Title Loans
Car title loans might be useful in the short-term but if you don’t pay it back in 30 days, you might find yourself racking up high late fees. More importantly, if you are unable to pay back your car title loan at all, the lender can repossess your car to recover the money. Now, potentially without a way to get to work, you may still owe the late fees for your car title loan.
Taking out money you have saved in your 401(k) might sound like a good idea but it could land you in trouble now and in the future. You will probably have to pay a penalty for taking money out of your 401(k) before you reach age 59 ½.
There are ways to borrow from your 401(k) where it could be beneficial but those are short-term loans while you remain at your current company. If you leave your company, you will most likely need to pay back the loan in full plus the 10% federal penalty for taking from your 401(k) early.
Debt Consolidation Loans for Bad Credit
There generally are no legitimate debt consolidation loans for those with bad credit because credit has an impact on interest rates. Be wary of scams that promise you otherwise by looking out for these six signs:
- The lender doesn’t look at your credit history.
- Fees aren’t disclosed, or the lender asks for an upfront fee.
- The loan is offered over the phone, which is illegal in the U.S.
- The lender’s name is similar to another lender’s name.
- The lender is not registered in your state.
- The lender asks you to wire money up front or pay an individual rather than a company.
If you have bad credit, it may be time to look into other debt relief options such as debt settlement, for which your credit score does not matter.
Debt Consolidation vs. Debt Settlement
If you don’t qualify for a legitimate debt consolidation loan, it may be time to consider debt settlement. Since debt settlement is not a loan, you do not need a certain credit score to use these services. Instead, you will work with a company who will negotiate with lenders on your behalf to potentially lower your debt. Debt settlement is not a loan, but will still provide the single monthly debt payment usually much less than what you are paying your individual creditors in total.
Our Certified Debt Specialists are standing by at 866-481-1597 to help you explore your debt relief options and work out a solution that fits your budget. Contact us today and get a free savings estimate.