Getting a debt consolidation loan with bad credit

Good use of a debt consolidation loan can help you improve bad credit.

If you've racked up a lot of debt and your credit score has deteriorated, a consolidation loan may be a way to improve your situation. You can consolidate several debts by transferring the balances to a single loan or line of credit, usually at a better rate. Used properly, this may be the first step in cleaning up your credit.

Consider a home equity loan or home equity loan
If you are a homeowner, this may be a good option for you. A home equity loan allows you to tap into your home’s built-up equity, which is the difference between the amount your home could be sold for and any claims held against it. People often use a home equity loan for home improvements, to pay for a new car or to consolidate their debt. This may be a good way to pay of your debt for two main reasons. First, the interest rate is usually one of the lowest loan rates a borrower can get. Also, the interest you pay on the loan is usually tax-deductible. But taking out a home equity loan for debt consolidation also means the lender can take possession of the home if the loan isn’t repaid. This is why some people decide to not borrow against their home, and may decide to take out a less risky personal loan.

Shop around for the best features
Make sure you get a consolidation loan that you can manage. That means shopping around for the best rates and terms. The consolidation loan with the lowest interest rate will probably be your best bet. Also be sure that you have a monthly payment that fits within your budget and that you can pay off your debt in a reasonable amount of time.

Don’t rack up more debt
Your previous credit may be why you ended up with a low credit score. Debt consolidation means that a loan will pay off your current balances. You will then make payments on your new loan to pay off your old debts. Since your credit card balances will be brought back to zero, you may feel tempted to continue spending, but this can perpetuate the debt cycle. (And can be particularly dangerous if you used a home equity loan to consolidate debt. If you can't keep up with your payments, you could use lose your home.) Instead, make a commitment to yourself to stop your bad habits so that you can get back in good financial standing. That means paying your bills on time, reducing your debt and not making impulse buys you can’t afford.