When you are dealing with an overwhelming amount of debt that you can’t pay off, debt settlement really serves as a new lifeline in such a situation. Even though debt settlement reduces your debt, it can still cause a lot of damage to your credit score and credit report. The reason: you are settling for less than the full balance. In simpler words, whether you like it or not, credit card settlement will always have a negative impact on your credit report and this notion will stay on the report for at least 7 years.
It’s true that a poor credit score can become a huge hurdle for you when you are trying to secure a new loan or credit but who said it’s impossible? Getting a new loan after debt settlement is very much possible but the catch here is that you might be offered higher interests and lower credit limits initially.
Things Lenders Look After Debt Settlement
It just makes sense that no lender would be willing to give you a loan after a debt settlement especially when they know that you weren’t able to pay off your previous balance in full. However, there are some gracious lenders out there who specialize in bad credit loans and with a little higher interest, they might offer you the loan you are in need of.
Here are some important factors lenders often consider after debt settlement;
1-Your Credit Score
The very first thing a lender will consider is your credit score. Now of course, due to the impact of settlement, your score will be low and your account will be marked as “Settled” instead of “paid in full”. Your lender will consider you a high risk borrower considering the fact that you weren’t able to fulfill your previous agreement terms.
2-Your Credit History
It’s not just your score that matters, in fact, lenders have complete right when they investigate your credit history because of the risk involved. Lenders will check how long ago you settled your debt. In most cases, recent settlements (the ones that happened 1 or 2 years ago) are more concerning. Whereas settlements that are older than 3 years, they are less concerning and they carry less weight especially if you’ve managed to build your credit during that time.
3-Your Current Credit Behavior
The reason why you should take measures to improve your credit right away after a debt settlement is that lenders often consider your current credit behavior and how you’ve been managing your bills and expenses after the debt settlement. If you’ve been showing positive and responsible financial behavior, it will reflect on your credit report and score. Your lender will check if you’ve been paying your current accounts on time or not. He will also consider the steps you’ve been taking to rebuild your credit and most importantly, if you have a low credit utilization ratio with no late or missed payments, it can serve as a huge green flag.
4-Employment And Income Stability
Securing a new loan after debt settlement doesn’t mean that your lender will just check and assess your situation based on your credit report. In fact, even if you have a less than perfect credit history but a stable job and a steady income, your lender might be willing to overlook your debt settlement damage and he’ll be willing to give you the loan you want. It’s just that you’ll have to provide evidence of income to your lender especially after your credit has taken a hit after debt settlement.
5-Debt To Income Ratio
The lower your DTI, the higher are your chances of securing a loan. It’s best if the percentage is below 36%. Your lender will check if your current loan can easily be managed considering your monthly income.
How To Improve Your Chances Of Getting A Loan After Debt Settlement?
If you are worried about rejections from lenders, it’s best that you start with a smaller loan as it can increase your chances of approval. It makes sense that no lender would want to give you a huge loan especially when you don’t have a great track record of paying the loan back in full. The smaller your loan amount is, the lower the risk for the lender will be.
Here are some more effective ways to improve your chances of getting a loan;
1-Consider A Secured Loan
When it comes to a secured loan, you need to provide a collateral for the amount you are borrowing. It’s the best option because when you provide a collateral, it reduces the lender’s risk and he’s more likely to accept your loan application even if you have poor credit. The thing you must know about a secured loan is that you have to deposit a security amount first and that amount will be your credit limit. You just have to keep your credit utilization ratio as low as possible because not only will it be beneficial for you but it’ll also improve your credit score.
2-Pay All Your Bills On Time
No matter how damaged your credit score is after debt settlement, you should immediately start working on improving it. One of the first things you can do is to start paying your bills on time. This step is of utmost importance because any more late or missed payments can further take a dig at your credit score. So to ensure that no further damage happens, it’s important that you keep a track of your payments and pay your dues before the due dates. On time payments will reflect positively on your credit score and eventually your lender will be more likely to approve your loan.
3-Consider Online Lenders
If you are looking for a new loan after settling your credit card debt, it’s best that you start searching for reliable online lenders. This tactic will work wonders for you because there are multiple lenders online who specialize in giving loans to people with a less than perfect credit. The only catch here is that you might have to pay higher interest rates on these loans but these lenders are usually very lenient with their approval criterias so it’ll be worth borrowing from them especially when you are recovering from the impact of a debt settlement.
The Final Word
It can get a little tough for people to get a new loan especially after they’ve just settled their previous debt but as said earlier, it’s not impossible. If you just look into the right options, explore different lenders and their criterias, you can easily secure a loan while working on improving your credit score. One important thing to consider here is that if you secure a loan, make sure to handle it responsibly and make the payments on time to avoid any further future financial difficulties. If not, you can end up into a deeper financial mess and it will become more difficult for you to come back on track. In a nutshell, securing a new loan after settlement is possible but you should only go for it, if you can manage the debt and the repayments comfortably. Making timely payments won’t just get you out of debt quicker but it will also improve your credit score and the impact of debt settlement will start diminishing with time.
FAQs
Q1. Can You Get A Loan After Debt Settlement?
Yes, you can get a loan after debt settlement but the process will be a little more difficult especially when you have a less than stellar credit score. Finding a lender who offers linenancy can be a little overwhelming, it will be a bumpy road for you but eventually with persistent efforts, you will be able to secure a loan.
Q2. How Long After Clearing My Debt Can I Get A Mortgage?
You can easily get a mortgage after paying off your debt and there’s absolutely no set limit for it. It’s just that you are supposed to meet the lender’s criteria including a low DTI, a fair credit score and a reasonable deposit amount. When you meet all these requirements, it becomes less important how long ago you cleared your debt.
Q3. How Long Does Debt Settlement Stay On Your Credit Report?
Debt settlement will stay on your credit report for 7 years. Even though it’s considered a black mark on your report, it doesn’t mean that you should stop working on rebuilding your credit. With timely payments and responsible financial behavior, you can improve your credit score which is the first thing lenders check when you apply for a loan.
Struggling with a poor credit score after debt settlement? Try Mountains Debt Relief services to ensure that you secure a new loan faster with a sounder financial future.