Debt consolidation is an attractive option for borrowers looking to make their debts easier and less expensive to pay off over time — especially people sick of dealing with a flurry of credit card bills with high interest every month.
All kinds of Americans pursue debt consolidation, including those with a wide range of credit scores. Although getting approved and securing a low-interest loan is typically easier with higher credit, there are low-interest loans available too.
Here’s more information on the process of applying for a consolidation loan with bad credit in particular.
Steps to Take Before Applying for a Debt Consolidation Loan
Most of the work of applying for a loan actually happens before you even, well, apply. Doing your research and making your application as strong as possible will help increase your chances at qualifying for a loan — as well as getting the strongest terms available to you.
Check Your Credit Reports
Checking your credit reports serves a few purposes. First of all, you’ll be able to catch and dispute errors that may be dragging your score down before you submit your application.
You’ll also get a clear idea of where you stand — allowing you to accurately estimate your score when asked during the prequalification process and helping you avoid surprise outcomes.
Take the time to request your free annual copies of your Equifax, Experian and TransUnion credit reports so you can look them over before applying.
Pay Off Small Debts if Possible
Lenders will compare how much you owe to how much you earn when deciding whether to approve you and how high to set your loan interest rates. This figure is known as a “debt-to-income ratio,” or DTI for short. Anything you can do to bring down your debt levels before applying can help you out in this department.
Shop around before deciding on a consolidation loan for bad credit. Rather than taking the first offer extended to you, explore all the options for which you potentially qualify — comparing head-to-head factors like loan amount, annual percentage rate, loan term and fees.
Explore Co-Signed and Secured Loans
Debt consolidation loans are generally unsecured, meaning your credit score is at stake rather than a physical asset. Some lenders do offer secured loans, which can be an option for borrowers looking to lower interest rates and increase chances of approval.
Another potential option is having a trusted friend or family member co-sign a loan, which basically extends their credit score to you. This approach does mean you both are responsible for the entire loan, so it is not a decision to take lightly. Make sure both parties understand all the risks before co-signing.
Submit Additional Documentation as Needed
Once you’ve done your diligent research, chosen a lender and even prequalified, you’ll need to submit some additional paperwork to get formal approval and receive funding. Some common supplementary materials borrowers can expect to provide include:
• Recent pay stubs
• Prior tax returns
• Bank statements
• Copy of your ID/driver’s license
Don’t be surprised if you get a notification that your credit score has changed at this point. While prequalifying does not cost your credit score any points, officially applying for a consolidation loan does. Luckily the damage should be minimal and temporary — and, if your debt consolidation loan does its job, you’ll have the opportunity to build up your score with consistent payments and shrinking debt levels.
Applying for a debt consolidation loan with bad credit is mostly a matter of doing your homework so you can find the right avenue for getting approved and reducing interest payments.