Some Bills.com readers who have bad credit mention unsecured loans as a means of consolidating their debt. In theory, it is possible to get an unsecured loan to consolidate debt. However, in practice, most people who want or need an unsecured loan to consolidate debt do not qualify for an unsecured loan. Why? Lenders want three things in a perfect borrower:
- Stable income
- Excellent credit history
- Low debt-to-income ratio
Two items on the list, credit history and low debt-to-income ratio, trip up many people seeking a debt consolidation loan. This is a classic catch-22 situation. The potential borrower would not need a debt consolidation loan if they had excellent credit and a low debt-to-income (DTI) ratio, and a person who needs a debt consolidation loan almost always has a high DTI and marginal credit. For these reasons, a person with low credit seeking a debt consolidation loan should look for a debt consolidation program or think creatively about a loan source.
Home Equity Loan
A home equity loan is a popular type of debt consolidation loan. Tighter lending guidelines along with a significant drop in property values in many parts of the country have made this kind of secured debt consolidation loan more difficult to obtain. A cash-out refi or a HELOC requires good to excellent credit, strong DTI, and most importantly, significant equity in the home. The days of 100% financing are gone; most lenders do not offer cash-out financing above 80% of your home’s value….. read more »