Consolidating your debt can be a way to simplify your personal finances. Some people are able to use consolidation loans to pay down debt faster. But if you have bad debt, you might wonder if you’ll be able to consolidate your debt. Find out about the pros and cons of consolidating debt with bad credit below and then discover some options for doing so.
1. Consolidating With an Existing Balance Transfer Card
If you already have a couple of credit cards, your bad credit won’t necessarily keep you from putting them to use. If one of those cards is a balance transfer card with plenty of credit limit left, you may be able to move debt from other cards onto it. That lets you deal with a single account and make one payment every month.
Here’s where will power is a big deal, though. It could be tempting to run up the balance on the cards you cleared. But what you don’t need, especially with poor credit, is double the credit card debt. How much of your open credit you’ve used is actually a major factor in determining your credit score, so this could drive your score down further.
2. Using a Secured Loan or Line of Credit
If you have the right resources, you might be able to get a secured loan or line of credit to consolidate your debt. One of the most common ways of doing this is with equity in your home.
Lenders are more likely to approve a secured loan for someone with bad credit than an unsecured one. That’s because the surety reduces the risk for the lender. If you take out a home equity loan to consolidate your debt and then you fail to pay that loan back, for example, the lender can come after your home. The value in your home helps to ensure that they get their money back whether you pay or not.
You might have spotted the increased risk for you as the borrower, though. If for any reason you’re unable to pay the loan back, your home is now at risk. That’s the downside with using a secured loan to consolidate debt.
3. Taking out a Personal Loan
A third option for someone with bad credit who wants to consolidate debt might be a personal loan. Personal loans are installment loans that you can use for whatever you want or need, often including paying off other debts.
The way this works is that you take out the personal loan and use the funds to pay off other debts. Then instead of multiple debts, you only have to deal with the one loan.
If you have bad credit and you’re looking for this type of loan, look for lenders who say they work with people with less-than-good credit. You may also want to find out whether you can use the loan for anything, as not all lenders support debt consolidation loans.
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