Can I Get a Loan on a Debt Management Program?

Enrolling in a debt management program should not impact your ability to finance or lease a car or qualify for a student loan.

While creditors may void benefits if you apply for new credit cards on a debt management program, this 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, here is what you need to consider:

  • Be practical and purchase a car that you can easily afford. Avoid new models and look for a used vehicle with low mileage.
  • Only consider monthly car payments that are lower than your current monthly car payment. This will give you extra money to save in your emergency fund or to 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 five years to repay. Remember, a shorter-term loan might have higher monthly payments, but ultimately you won’t pay as much interest.
  • Whenever possible, finance a car loan through a bank, preferably a savings and loan 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.

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.

A low credit score, low income and high debt will negatively impact your ability to qualify for automobile financing at favorable rates, not participation in a debt management program. 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 qualifing for a student loan while on a debt management plan. Government-backed loans don’t use you credit report to determine if you qualify, so the deb management plan won’t penalize you. Private lenders do, and might not be interested in dealing with you. 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.

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.
  • Longterm, stable employment decreases your risk profile. If you can, stick with your employer for the long term, 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 are having trouble qualifying for a car or home loan, consider alternate repayment plans that reduce the amount you must pay monthly.

Alternatives to Borrowing

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 might not be wise. So if the dishwasher breaks and you have enough to repair it, that might be better than buying that new stainless steel model on time.
  • Consider how to borrow. Applying for a payday loan, for instance, might be worse for your finances than forgoing all but the most urgent expenses.
  • 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.

Another thing to remember when applying for any sort of loan is that a debt management plan isn’t necessarily a scarlet letter on your financial life. Debt management companies don’t report your participation in a program to the credit bureaus, although your creditors might. Your score may initially decline when your current accounts are closed, but it should improve 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 even 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.

As a rule, you should always consult review your budget if you want to borrow anything while under a debt management plan. 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.

Sources:

NA, (2012, November). Coping with Debt. Retrieved from: https://www.consumer.ftc.gov/articles/0150-coping-debt