Bad credit and severe debt are a recipe for a nightmare. If you have bad credit, it’s difficult to climb out of debt. And if you have severe debt, it’s difficult to establish a good credit that can help you find solutions to deal with debt a lot easier.
The truth is, bad credit causes high-interest rate charges on home and auto loans, credit cards, and deposits for utilities and housing. And these are what keep people in debt. It’s a vicious cycle, feeding on itself and keeping consumers from gaining control over their finances.
But are you doomed to a lifetime of fees and high-interest rates?
No. Regardless of how deep you’re in debt, you still have options for climbing out of it. This article discusses some of the best options for debt relief if you have bad credit.
1. Personal Loans
If you have a savings or checking account, then you have a relationship with a bank. And every bank wants to keep their customer for the next 25 years.
So, probably the best place to find debt relief is by asking your bank for available personal loans for bad credit.
These loans are either unsecured or secured (backed by collateral like a car or a home). The interest rates, terms, and fees for these kinds of loans can vary by lender. Various banks offer loans to those with bad credit, however, the threshold for what’s considered as a creditworthy borrower will vary by institution.
Some banks may have stricter requirements than others, so it’s important to check with your bank about the details.
2. Debt Consolidation
This is a loan you can use to pay off your debts. It allows you to streamline multiple debts into a single convenient monthly payment. And if you can get a debt consolidation loan at a lower interest rate than what you are paying off your high-interest debt like credit cards, then you save a lot of money.
Those with good credit can get a debt consolidation loan at about 7% APR. However, since you’re looking for an option for your bad credit, you can expect interest rates of 15 to 20%.
The lower your credit score, the less a debt consolidation loan can make sense for you as a way out of debt. Lenders will either offer you one with a high-interest rate or won’t give you any loan option at all.
Hence, if the interest is high or it exceeds the rates of your current debts, then look for another debt relief option for bad credit.
3. Home Equity Loan
If you have a home, then you should consider a home equity loan. With this type of loan, you could borrow against up to 80% of your home’s equity.
Interest rates for this loan tend to be lower than personal loans since your home will be put up as collateral. Obviously, if you can’t pay up, the lender can foreclose your home. The great thing about this debt relief option is that your credit score won’t be a factor.
4. Debt Management Programs
Debt management programs offer debt relief for those with really bad debt and credit scores. This is a good place to turn when your financial situation has become so dire that you are unsure of the next best step.
This is not a loan. A debt management program can provide credit card consolidation. They can help negotiate new terms with your lenders, as well as provide credit counseling that can help you reduce your interest rates and lower your monthly payments.
In short, debt management programs can provide a level of order in your uncomfortable and chaotic situation.
5. Debt Settlement
Essentially, debt settlement is a type of debt forgiveness and should be considered as your last resort. It allows you to pay off your debts for less than what is owed. If your lender agrees to a debt settlement, your remaining balance will be canceled.
You can hire a lawyer, a debt settlement company, or do it yourself. Some debt settlement agencies can help you settle your debt for up to 50% less than what you owed. However, they’ll want their cut for their service too, usually charging 20 to 25% of the amount saved.
Debt settlement has several drawbacks. For one, it can take years to settle a debt. And even if the debt settlement agent tells you to stop making payments for your credit card debts as they negotiate, the interest and late fees still occur.
Lenders are not required to accept the offer. And if they do, they’ll report back to credit bureaus, which will leave a negative mark on your credit report for seven years. Lastly, there can be income tax implications to a debt settlement since the amount of debt forgiven will likely be considered as taxable income.
And there you have it! If you’re feeling overwhelmed by your debts, don’t lose hope just yet. You can consider these debt relief options that will help you get your financial obligations under control.
Debt relief may take different forms, and one may work for you than another. So, make sure to understand your options and weigh in the most beneficial one for yourself.