Bad Credit Debt Consolidation

Bad Credit Debt Consolidation

Written by Caitlin Wood
Last Updated March 13, 2020

Have you found yourself with too much debt and no idea how to pay it off? Maybe you’re currently in this situation because of a job loss, a bad business deal, too many loans, or too much credit card debt. Whatever the case may be there is always a solution, even for the most dire of circumstances. Before you consider a consumer proposal or even bankruptcy you need to think about debt consolidation.

What is a Debt Consolidation Loan? 

Debt consolidation is when you consolidate or combine all your debts under one larger loan so that you only have to make one easy to handle monthly payment; typically, the main goal is to get a lower interest rate so you can pay off your debts quicker. You can apply for a specialized debt consolidation loan that is specifically meant to help those who need to work on paying down their debt.

While unsecured debt consolidation loans do exist if you’re looking to consolidate a large amount of money your best option is to provide security in the form of collateral. This will not only increase your chances of getting approved but will hopefully afford you a lower interest rate which is exactly what you want when it comes to debt consolidation loans.

Debt Consolidation with Bad Credit

If your credit has been damaged because of the debt load you’re currently carrying, there’s no need to panic as it is still possible for you to consolidate your debt. For people with bad credit, we suggest that you get in contact with a professional credit counsellor or a company with a debt consolidation program as they will be able to help you throughout the whole process. A credit counsellor will help you manage your money and debt as well as plan a budget for you. There are many programs that specifically deal with debt consolidation and bad credit, asking for the help you need will allow you to take back control of your finances and work toward finally being debt free.

Canadian credit score ranges

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How Debt Consolidation Can Help You

If you’re currently considering debt consolidation and feel as though it’s the right option for you here are a few of the advantages you can look forward to:

  1. You’ll have less to worry about

You’ll be surprised at how consolidating your debts into one easy to handle payment will make your life significantly less stressful.

  1. Fees are usually manageable

If you choose to work with a professional credit counsellor you’ll have to pay a fee but it’s usually manageable and it won’t affect your ability to pay off your debts.

  1. Lower interest rates

The main goal of a debt consolidation loan is to get a lower interest rate. This means more of your money will be going towards paying off your actual debts and you’ll become debt free faster.

  1. You’ll be put on a schedule

While some might not consider this an advantage, being placed on a payment schedule not only means you’ll be accountable to someone but you’ll know your debt free date which is a great motivator for most people.

  1. Your debts are consolidated in one place

All your debts are combined under one loan. Instead of dealing with different creditors, you take out one loan to pay them all at the same time thereby, giving you more control over your finances. You will also have an easier time keeping track of your debt repayment and your finances in general.

debt reduction techniques

Learn how to tackle your debt without debt consolidation, here.

More Options Available to You

Debt consolidation loans are a great option for many people who are currently being weight down by their debt load but they’re not the only option. To make sure you’re making the best choice possible for your situation it’s always best to compare your options and then chose the one the best suits you.

Personal Loan (DIY Debt Consolidation)

If you don’t want to work with a credit counsellor or a debt consolidation firm you can always take out a small personal loan and consolidate your debts on your own. Just make sure the interest rate isn’t higher than the ones you already have as consolidating your debt with a higher interest rate will end up costing you more and consolidating with the same interest rate is frankly a waste of your time.

This option is the best choice for those who do not have too much debt they wish to consolidate, as getting approved for a large loan when you have a lot of debt is often quite difficult.

Credit Card

While we wouldn’t necessarily recommend this for everyone, if you can find a credit card with a low-interest rate then it might be a good option. Just remember that transferring the balance of one credit card to another is called a balance transfer and comes with its own set of fees so it might not be worth the extra cost.

If you’ve decided that using a credit card to consolidate your debt is the best option for you, look for a credit card company that offers a card with any or all of the following features:

  • A very low-interest rate
  • A special 0% interest introductory period, that lasts at least 6 months
  • No balance transfer fees

Certain credit card companies will run special promotions for new customers wherein they offer them a specific period with zero interest. If you’re going to use a credit card to consolidate your debt this is the deal you need to be on the look out for. This type of deal will save your hundreds if not thousands of dollars in interest and provide you with the motivation you need to aggressively pay down your debt within the time that the promotion is valid for.

Debt Management Program

This option is great for those who need money management help as well as debt repayment help. You’ll work with a counsellor who will negotiate with your creditors, create a repayment plan for you and help you work out a budget.

With a debt management program, all your eligible debt is consolidated into one monthly payment. You’ll make this payment to the credit counsellor you’re working with who will then distribute it to your creditors. Most credit counsellors can negotiate a reduction, of up to 100%, in their client’s interest rate. In order to be able to enter a DMP, your creditors will have to agree to the terms that your credit counsellor offers them. Most consumers who enter DMPs to consolidate their debt are debt free within 3-5 years.

The Main Benefits of a DMP

  • Reduction in interest rate
  • Debt, credit, and budgeting advice from your credit counsellor
  • Debt free in 5 years or less

Debt Settlement Program

Debt settlement should only be considered as a viable option for those who are completely overwhelmed by their debt and have no way of paying it off. When you work with a debt settlement service provider the amount of money you owe will be reduced and you’ll be debt free quickly. In order to settle your debt, you need to be able to offer your creditors a one-time lump sum payment typically 20%-80% of the amount owned, at which time your debt will be marked as paid in full.

Debt settlement will negatively affect your credit score, but the good news is that you’ll be able to work to start repairing it as soon as your debt is marked as paid in full.

Choosing the Right Option for You

Whichever option you choose, be sure to search for the best loan terms. It should be your number one goal to get a lower interest rate, no matter what option you go with. You should also make sure to get the best monthly rate for paying off your debt. Choose a monthly sum that works best for you as debt consolidation is meant to make your debts manageable. In the long run, debt consolidation will help you maintain your credit score. Having bad credit doesn’t mean you should give up paying back your debts. Finding the best option that works for you can help you take control of your debt and start to restore your bad credit.

Caitlin is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security. One of the main ways she’s built good financial habits is by budgeting and tracking her spending through the YNAB budgeting app. She also automates her savings so she never forgets to put aside a portion of her income into her TFSA. She believes investing and passive income is key to earning financial freedom. She also uses her Aeroplan TD credit card to collect Aeroplan points so that she can save money when she travels.

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