Debt Consolidation Loans and Bad Credit – Get the Loan or Get to Counseling

The two great tastes that taste great together are definitely better suited to Reese’s Peanut Butter Cups than with Debt Consolidation Loans and Bad Credit. Personal loans always require some comparison and some thought in what you are trying to accomplish. When your credit score is considered bad or poor, you have to watch the rates to make certain that you can afford the loan and you aren’t paying more on the loan than you are on your existing debt payments.

Even if the rates are closer to each other, I’m a proponent of personal loans if feasible, as a credit improvement tool,  because you get a debt certain to pay off your debt, you can double your credit lines while shrinking your credit utilization rates and you change your credit mix with the loan adding variety to your revolving credit card debts. With on-time payments, you can really start to change things for the better. But a person’s ability to do this is really dependent on exactly how bad their credit is.

How Bad is Bad?

So the three credit bureaus, Experian, Equifax and Trans Union each compile your credit and payment data and come up with a score which determines where you stand in the credit scheme – from Excellent all the way down to Very Poor/Very Bad. FICO, is an organization which takes information from the three bureaus and comes up with their own scoring. FICO states that 90% of the top lenders rely on FICO scores to make lending decisions.

In general, according to Experian, any score below 580 is considered poor (bad) credit. I have seen lenders that have stated that they consider bad credit to be any score under 640. As you can see, there are some differences but the further south you go under 640, the more difficult it becomes to attain a personal loan or even a personal loan with acceptable rates. A 36% interest rate may not help you if you are trying to consolidate debt because the rate is so high. You can use it to consolidate debts you can pay off easily and do so in order to start building your credit up, but if the rate is sky-high, your monthly payments may be worse.

Options to Consider

I don’t say any of this lightly or come at you or anyone with anything but care and concern and a desire to help because I have been in financially precarious positions in my life as well. If you’ve read some of my Blog Posts or the About Me page on Loan Camel, you’d know that I too was once on a Chapter 13 Bankruptcy plan… and an unnecessary one at that in my opinion.

Here are the options you have and what Daddy Poorbucks (me ya’ll), Loan Camel’s Debtor-in Chief,  thinks of each:

Bankruptcy Option

In my situation, I was loaded down with divorce and medical debt… and some not so emergency debt. I had a perfect payment history and scores in the “Very Good Credit” range in the 700’s. I walked in and out of a bankruptcy attorney’s office on a gloomy November day making an unnecessary decision to go into a Chapter 13 Plan. I could have done 2 other things before this but I listened to my lawyer.

I mean, even worse, I’m a lawyer but I did not understand this arena. I didn’t understand the real alternatives and their impacts. The lawyer thought it was a great idea to do a Chapter 13. Hell, she said she wasn’t even used to people with good credit like me. Guess what – Now I had bad credit. 7 years is how long it took to drop off of my credit reports and 10 years is the time it takes to drop for a Chapter 7 bankruptcy.

Essentially, in a Chapter 7, you walk away from all of your debts.  In a Chapter 13, you are more likely to exempt some such as a house and car, from the bankruptcy and your creditors, and you are making an effort to pay back a portion of your debts to your creditors through a plan.  People with stronger incomes and assets ordinarily opt for a Chapter 13 which is essentially a reorganization, whereas a Chapter 7 is a liquidation.

Credit Counseling/Debt Management Plan Option

So I didn’t know better, I had no one to talk to and all I knew was that I was protected under the laws in the case of a bankruptcy from suit by my creditors so I went with that as the deciding factor. If you cannot get the right personal loan and you are unable to get on a feasible Debt Management Plan (DMP) then bankruptcy is something to consider if you are overwhelmed with debt and your credit really sucks.

So before I get to the personal loans, a Debt Management Plan (DMP) is a plan that is created with an approved financial counselor to help you potentially negotiate your debts down with your creditors and consolidate all of your debts into one payment. The payment is made to the counselor each month and they then pay your creditors.

There are some big hits to your credit to start including a remark that you are on a plan and not paying as agreed in the original loan of credit. You are forced to close your credit cards which instantly hits your debt utilization number as well as lowering your average age of accounts, this all factors into lowering or raising your credit scores.

One difference from bankruptcy is that when you pay your creditors off, the negative remarks on your credit about “not paying per the original agreement and being on a payment plan” – that all gets removed immediately. When I completed my 5 year payment plan on my Chapter 13 bankruptcy (BQ), I had to wait an additional 2 years for the bad remarks to drop off. A DMP is preferable to a BQ, if you can get it done, in my opinion.

You must use a financial counselor/advisor who is qualified for this work and the U.S. Department of Justice has a List of Approved Credit Counseling Agencies, with Agencies in each State so that access to the public is readily available locally or at least in numerous vicinities. I like this option better than bankruptcy for many situations if you can get on a plan that you can afford.

Personal Loan Option

I’m partial to personal loans because they helped me to take my credit from the low 600’s at a bankruptcy discharge into the 800’s with exceptional credit. When you take out a personal loan and consolidate all of your debt into one loan you essentially double your credit line and significantly decrease your overall credit utilization number.

To do this you must not close any of your credit card accounts. You want to keep them open with zero balances. Use your debit card as your go to card and only go to your credit cards if you have no choice – and then make certain that you pay them off within 3 months.  Why 3 months?  Because After that amount of time, I feel like it becomes too easy to fall back into old habits.

What personal loans also do is give you a date certain where you pay off all of your debts. They should lower your monthly payment amounts as well. I cut my payments by about 35-40% when I took a 5 year loan. You can take a 3-year loan but your payment will be higher so your budget is something to consider.

Every month you make a payment gets you closer to your goal. Years of payments on this plan, and making all payments to all creditors on time, will easily take you into a higher credit rating class or classes if you stick with it. It happened for me, it can happen for you as well. Just be careful that the rate is not so high that it defeats the purpose of the loan, at which point I would look into the Debt Management Plan Option described previously.

Change Things for the Better – You Can Have Success Too!

To change things for the better, get spending under control. Do not buy unnecessary things. I can buy a new car but I haven’t. I have kept my 155,000+ mile car and will run it until I can’t. I feel more powerful. I pay for things with my debit card and I feel more powerful. I feel stronger, healthier and more in control. The power of buying less but not racking up debt gives me a lift and it will do the same for you too.

At first my credit dropped from the loan but then it rebounded and kept going up. This may happen to you as well but not to worry. That drop is temporary when you follow my plan.  That said, I need to reiterate this point as I do in most of my posts as you cannot effectively change your financial life simply through debt consolidation loans alone.

Consolidation loans simply help you move debt into a place that is more manageable so that you can pay it off at a date certain but YOU MUST CHANGE THE BEHAVIOR THAT GOT YOU WHERE YOU ARE, where possible.

With this in mind and to start on your new path, Loan Camel offers the ability to check loan rates and apply for loans by going to our source of Personal Loans by clicking here. Get yourself off in a positive new direction and start experiencing a far less stressful world.