How To Get Out Of Debt With No Money and Bad Credit

Posted on December 10, 2020 in Debt

Borrowing money has become an essential part of almost every adult’s life. Just about anyone with a long term financial plan will require taking on considerable debt at some point. Attempting to access education or various career opportunities, or just buying a car or home will come with taking on financial debt. 

With all this in mind it’s no surprise that the average American debt is now $90,460 when taking into account credit cards, personal loans, mortgages and student debt. So, how does someone get out of a debt that on average is almost $100,000 when they have no money and bad credit? 

Debt Consolidation

This option is one of the more common solutions to helping repay debt with no money and bad credit. 

The idea behind this solution is to take multiple debts, generally high interest debt such as credit cards or personal loans, and roll them into one loan with a preferable interest rate. This helps to reduce the total debt and reorganize it so it becomes easier to pay off faster. 

Typically speaking, this action is performed by opening a new credit card and essentially transferring the debt to that new account, then closing the current accounts. Now depending on just how bad the credit score is, the interest rate may not be favorable to the pre-existing loans, which would hurt the effectiveness of this plan. 

Of course, most credit cards come with various promotional deals such as zero interest rates for the first year or some variation of lower interest policy. If the credit card does, this could go a long way to helping save money even if the debt isn’t paid off after the promotion ends. 

However, even with a similar interest rate to the current loans this plan would help make payments easier as they would now be made to one loan as opposed to multiple loans with differing terms, interest rates and policies. 

Personal Loans

Anyone with a checking or savings account open at a bank has a direct business relationship with them. As is the case in all forms of business, the bank would like to keep its customers happy and stay with them for years and even decades to come. 

As a result of this, anyone with no money and bad credit but with a solid banking relationship has the option of taking out a personal loan to help with their debt. This option is similar to debt consolidation but with a few differences. 

A personal loan generally has lower interest than credit cards and unlike credit cards it’s not revolving credit, meaning it’s a one time amount and there is no adding on to it even if parts are repaid. These loans also have dates to be repaid, typically within 12-84 months of the date the loan is taken out. The interest rates are fixed and once the account is paid off it is closed and removed from the account. 

The key idea to this plan is to take out enough money to pay off all the other loans and debts accrued, then pay this one back slowly over the course of the loan’s term.

Join A Credit Union

For those that don’t have a relationship with any various banking institutions, or even if you do have one, joining a credit union can be a big help to eliminating debt. 

One of the most significant benefits to being a part of a credit union is the substantially lower interest rates they offer. This means that a borrower will accrue less debt over the time of paying the loan and ultimately can save a lot of money. 

When compared to banks, credit unions are often much less rigid with eligibility requirements for loans as well, meaning that the borrower can get a much better loan from a credit union than from a traditional bank. The reasons for these key differences is that while banks are for-profit financial institutions, credit unions are considered nonprofit. 

Ask Family or Friends For Help

This option can be one of the best or one of the worst based on each individual case. Asking loved ones for financial assistance can be one of the most humbling and humiliating circumstances for an adult to endure. However, this assistance could be the best option if a borrower has a bad enough credit score. 

The best advice if considering this option would be to treat this as much like a business interaction as possible. Legally documented and signed statements with set in stone payback plans will go a long way to helping soothe the transaction. While this option won’t have as many legal or financial consequences, it could permanently negatively affect the relationship with whomever you’re borrowing from, so caution is advised for both parties involved. 

Home Equity Loan

Now, this option is unfortunately only available to those that own a home or property. However, it is still a potentially life-saving option for getting out of debt. 

Home equity is the stake an individual has in their home or property as opposed to the stake the lender has in it. The number is calculated by subtracting how much is left on a mortgage from the appraised value of the home or property which means that home equity will increase every time payments are made on a mortgage. 

A home equity loan is essentially a second mortgage that allows a borrower to tap into the home equity and therefore get quick access to a large amount of money. Since mortgage interest rates are almost always lower than credit cards and generally lower than most traditional loans, they are a solid option for anyone attempting to get out of debt.

Peer to Peer Lending

This option is relatively new to the financial world but can be a benefit to look into in order to help eliminate debt. A borrower would apply for a loan online on peer-to-peer lending platforms while investors select from these applications choosing the ones with the least risk. 

Using this type of loan can be highly beneficial to borrowers as they may be able to find a personal loan which was denied by all other traditional loan institutions. There is still risk involved however as the peer-to-peer platform may charge its own fees and interests on top of what the lender would charge. It’s very important to thoroughly read all the fine print before agreeing to any loan but this one in particular requires extra attention.

Debt Management Programs

Debt management plans are offered by credit counseling agencies as a way to better help a borrower get on track with paying off their debt by setting terms and goals. 

A credit counselor would go over the borrower’s financial situation thoroughly and discuss the options available. Depending on what those may be, the credit counselor will then attempt to contact the lenders and owners of the debts and seek potential concessions. These may include lower interest rates, lower monthly payments or even extending an account to help stop late fees. 

Each month the borrower will pay the counseling agency, who then uses this month to pay off the various loans and debts once they’ve been agreed upon. The only downside with this plan is the fees charged by the credit counseling agency, but there are some nonprofit options available although they may not be as successful. 

Debt Settlement

This may be a little harder to achieve for debts but it’s still a very real and effective option. Debt settlement is using a third party company, like a credit counseling agency, to negotiate the remaining debt of an account into a one time lump sum payment to close the account. 

Now, this option would require the money to be on-hand, and depending on the amount left on the debt, that could be quite substantial. However, since these negotiations can oftentimes eliminate a large amount of the debt, it’s worth considering in order to quickly close an account, even if it means opening up a new one in order to get the money to pay off the now negotiated debt. For more information, read our guide on debt settlement pros and cons to decide if it’s really worth it for you financial situation.

The Takeaway: With no money and bad credit, getting out of debt will require outside help, the best option being a debt consolidation loan to potentially help reduce the total interest being paid as well as the minimum monthly payment.

In a world where almost everyone has substantial debt, paying it off can be quite tricky, especially for those with bad credit and no money. 

However, as we’ve discussed today there are plenty of options available to anyone searching for a way out from under their debts. Some are more risky than others but there are always plenty of places to turn when further advice is needed. And remember, in certain financial situations being debt free may be worth damaging your credit score in the short-term.

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