The idea of availing a debt consolidation loan has gained prominence over time, majorly because of increasing debt margins amongst individuals. Before we go on to evaluate whether or not a debt consolidation loan is good option for people with bad credit, let us first comprehend the concept of debt consolidation and how it works.
Debt consolidation basically means to consolidate your debt by combining all types of unsecured debt on your head and converting it into a single debt instrument that is more conducive and convenient to pay off. When we make reference to unsecured debt, we are basically taking into account debts in the form of credit cards, personal loans, payday loans, etc. – basically any type of loan that does not particularly involve a form of collateral.
Many banks offer debt consolidation loans to help individuals clear or pay off a number of other loans. While debt consolidation loans are quite easily available (or so to say), they might not quite be easy to get if your credit history has a blemish.
Credit histories play a major role in availing any form of credit, be it credit cards, personal loans, car loans or home loans. Credit scores that figure in your credit report give financial institutions a fair idea about how good you’ve been in managing your credit. A good credit score would indicate that you’ve been a prudent manager of your debt while a bad credit score would imply that you haven’t really been managing your credit well in the past, and the probability of defaults or late payments are more pronounced.
In order to compute a credit score, there are three major factors that are taken into account, besides a few other factors that have a relatively lesser bearing. The three major factors include your credit history that highlights defaults and late payments, the amount of credit instruments you’ve subscribed to, and the total amount of debt in your name. Another rather influential factor is the amount of credit card debt you’ve used against your total allotted credit limit.
Debt consolidation loans help a great deal, especially if your total debt is spread across various unsecured loan instruments. Say you have a certain amount of debt on your credit cards and a certain amount in the form of a personal loan. Instead of making repayments every month towards different types of debts in your name, a debt consolidation loan will help you pay off all your existing debts, giving you the convenience to make payments towards a single debt instrument – which now exists in the form of your debt consolidation loan.
Well, if your debt is spread across too many loan or debt instruments, a debt consolidation loan is definitely a good idea. However, taking to other forms of borrowing when you’ve already availed a debt consolidation loan will only ruin things and in that case, a debt consolidation loan will not really serve the purpose of pulling you out of debt. Moreover, as most debt consolidation loans have relatively longer tenures, the possibility of falling into other forms of debt is also fairly high.
Making sure your credit history isn’t blemished right from the time you’ve been offered your first credit card or loan is extremely essential. Late payments and defaults can severely affect your credit score and give financial institutions a negative opinion about your ability to manage large credit. However, it isn’t impossible to get a debt consolidation loan if your credit outlook is bad. Here are a few factors that can work for you if you wish to avail a debt consolidation loan with a bad credit.
Your income can be quite an influential factor in the event of bad credit affecting your loan application. Banks will agree to lend you money if your income is good enough to pay up for the loan, even if your credit outlook isn’t all that impressive. However, if your income isn’t good enough and most of it is going towards paying off your debts, you most likely won’t get a loan from your bank.
Having an existing relationship with the bank also helps your cause if your credit score isn’t good. Taking into account that you’ve been making repayments over a period towards the loans you’ve borrowed from a particular bank, the bank might agree on lending you the amount required to pay off all your other loans, enabling you to consolidate your debt and eliminate the hassle of making repayments towards multiple debt sources.