Getting a Loan on a Debt Management Program
The purpose of a debt management program is to eliminate credit card debt and teach consumers how to manage their money.
If taking out a loan while trying to eliminate debt sounds counter-intuitive … well, that’s because it is!
It is possible to get a home loan and very possible to get a car loan, student loan or new credit card while you’re on a debt management program. Nonetheless, a good nonprofit credit counseling agency would advise you to slow down and weigh the risks before acting.
If you absolutely need a car loan because it means transportation to your job or a student loan because it means getting closer to finishing your degree, then yes, it makes sense to apply for the money.
However, if you enrolled in a debt management program because you had problems making on-time monthly payments, adding a significant amount of debt to your portfolio may be setting yourself up for even bigger problems.
And just a quick reminder: Some card companies void the benefits of a debt management program – lower interest rates, reduced monthly payment – if the consumer applies for new credit cards, while on the program.
That penalty does not extend to car loans, mortgages, student loans and other types of debt.
Financing a Car on a Debt Management Program
If you are shopping for a new car and financing while on a debt management program, the lender is going to look closely at your credit score and recent payment history.
If your score took a few hits because you missed some payments, the lender could still approve a loan, but expect the interest rate to be closer to 20% APR than the 5%-6% that consumers with a good credit score pay.
Some lenders will look favorably on your participation in a debt management program because it shows responsibility. If you have a steady job and income, they may offer you more favorable terms, but not their lowest.
Here are some other things you need to consider before you go car shopping:
- Be practical. Purchase a car you easily can afford. Look for a used vehicle with low mileage.
- Use an auto loan payment calculator and play with the numbers to see if you can afford it.
- Only consider monthly payments that are lower than your current car payment. This will give you extra money to save in your emergency fund or put toward your next car.
- Before you opt for a buy-here, pay-here dealership loan, review your options. Don’t consider a loan that takes more than four years to repay. Remember, a shorter-term loan might have higher monthly payments, but ultimately you save on interest.
- Whenever possible, finance a car loan through a bank or credit union, which typically offer better deals than dealerships.
- Resist the temptation to lease a car. A low credit score might make getting a loan difficult, but leasing, with the fees and charges attached to it, is not the best financial move. If you must lease, don’t lease to buy and don’t agree to a term of more than three years.
Before heading to the car dealer, be sure to check in with your credit counselor and go over the pros and cons of taking out a loan. What you probably will hear is that if your current vehicle is in good working condition, don’t trade it in for something newer. Once it is paid off, keep driving it for as long as possible, saving the monthly payment in an emergency fund or use it to pay off your debt faster.
In short, participating in a debt management program will have far less impact on your application for a car loan than your credit score, income and amount of debt. Learn more about how to improve your credit score while enrolled in a debt program.
Getting a Student Loan on a Debt Management Plan
You will have no problem qualifying for a student loan while on a debt management plan. Government-backed loans don’t use your credit report to determine if you qualify, so the debt management plan won’t penalize you. Private lenders do look at your credit report, and might not be interested in dealing with you. You also can take a look at your free credit report to verify its accuracy.
If you’re offered a scholarship or grant from your college or university, take it. It’s money that helps offset your costs and has no impact on your management plan. If you have to take out a student loan to pay for school, check in with your credit counselor on what the best options are.
Improving Your Loan Application
Whether you are applying for a car loan, mortgage or personal loan, here is some advice to help you qualify at favorable terms.
- Clean up your credit report. Make sure all accounts are current. Pay off old debts. Lenders don’t like to see settled debts when they are considering you for a loan.
- Long term, stable employment decreases your risk profile. If you can, stick with your employer for the long run, especially prior to applying for a loan.
- Lower monthly payments on your student loan debt will help with your debt-to-income ratio. If you were denied a mortgage, or are having trouble qualifying for a car loan, consider alternate repayment plans that reduce the amount you must pay monthly.
Before taking out a new loan, especially one with a high monthly payment, be careful.
- Is there any way you can meet your objective without borrowing? Adding more debt is not wise. If the dishwasher breaks and you have enough money to repair it, that might be better than buying that new stainless steel model with credit.
- Consider how to borrow. Applying for a payday loan, for instance, is a disaster for your finances. If you’re facing a crisis financial situation, ask a relative or friend for help.
- Think about how any additional borrowing will affect your ability to stay current on your debt management plan. Remember, the debt plan is your financial lifeline, don’t mess it up.
- Before buying to replace a major home appliance, consider repairing what you have for a few years of additional life or replacing with a used unit.
People often worry that participating in a debt management program will have a negative effect on their credit score. Not true! Debt management companies don’t report your participation to the credit bureaus, although your creditors might. Your score will decline slightly when you start a program because you are required to surrender all but one credit card, but it will improve within six months as you make consistent on-time payments.
And there seems to be little consensus among lenders about what a debt management plan says about your ability to handle debt. Some view it as a positive, demonstrating that you are conscientious about paying you loans rather than defaulting.
Even if your debt program restricts opening up new credit card accounts, other types of loans won’t violate the terms of your agreement. You can get a mortgage while on a debt management program, assuming you meet the underwriting standards.
The best advice while under a debt management plan, is to ask a credit counselor to review your budget before you seek any kind of loan. Even if you can borrow, remember that the reason you entered the plan is to get out of debt as quickly as possible.
Taking on additional debt might defeat your objective.
About The Author
Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.
- NA, (2012, November). Coping with Debt. Retrieved from: https://www.consumer.ftc.gov/articles/0150-coping-debt