At a Glance
With a debt consolidation loan, you get a single personal loan from an issuer and use that to pay off all your other debts. But securing a debt consolidation loan can be difficult if you have a bad credit score. Poor credit scores are seen as risky for lenders. What to know when you have a bad credit score but want to consolidate your debt:
Ways to get a debt consolidation loan for bad credit
Though getting a debt consolidation loan with bad credit can be tricky, using these tips can help you secure one.
Check and monitor your credit report
Knowing your credit score is the first step to getting an idea of whether you’ll be approved for a loan. Most lenders consider any score below 629 “poor” credit. The lower your score, the higher your interest rate will be. And if you don’t meet the lender’s required score, they could decline you outright.
Checking your credit report could help you catch an error that, if fixed, could boost your score. Moving from a bad credit score to a fair or average credit score could be the difference between getting denied and approved. At the very least, an improved credit score could get you a better interest rate.
Compare loan options from different lenders to get the optimal repayment structure for your budget. You can look into prequalifying with online lenders before applying for a personal loan. With prequalification, the creditor runs a soft credit check, which doesn’t affect your credit score.
You’ll want to compare rates, but also consider additional fees, prepayment penalties, and other terms in the fine print that could cost you in the long run. Landing the right loan can save you a bunch of money.
Add a cosigner
If you’re unable to qualify on your own, some lenders will let you add a cosigner to meet the criteria. Adding a cosigner can also help you get a lower interest rate. The cosigner’s credit score usually needs to at least meet the creditor’s minimum requirement. Keep in mind that the cosigner also is financially responsible if you default on the loan.
Improve your debt-to-income ratio
If you’re not in a hurry to consolidate debt, one way to help your odds of getting approved for a debt consolidation loan is to improve your debt-to-income ratio. This is a big factor for lenders in determining your ability to repay a loan.
See if you can increase your income by picking up extra shifts at work, adding a side hustle, etc. Also, think about paying off some smaller debts.
Think about a secured loan
Debt consolidation loans are usually unsecured, meaning you’re not putting anything up for collateral. But a secured loan could be an option if you’re having trouble qualifying for an unsecured one.
Where to get a debt consolidation loan for bad credit
The number of lenders may seem infinite when it comes to searching for any type of personal loan. Credit unions, local banks, and online lenders are a good place to start.
Credit unions and local banks
If you already have a relationship with a local bank, you may be able to get better terms for a debt consolidation loan. They’re also more likely to work with you if your credit is subpar in this case.
To apply with a credit union, you need to be a member. Credit unions don’t do prequalification, so applying with one will usually require a hard credit inquiry.
A credit union can’t charge more than an 18% interest rate.1 Loans made under the National Credit Union Association’s Short-Term Small Loan program are the exception. They can charge an annual percentage rate (APR) up to 28%.
While you may be able to get better rates from a credit union, online lenders are more likely to approve you if you have a bad credit score. The APR from an online lender can range from 28.5% to 32% for a bad credit score.
You also need to be aware of origination fees with online lenders. These fees are used to cover the cost of processing your loan, which can bump your overall cost of financing and take away from the proceeds of the loan.
Online lenders that have debt consolidation loans for bad credit include the following:
Find personal loans for people with bad credit
Check out lenders and solutions that fit your needs.
Benefits of debt consolidation
There are several advantages to debt consolidation loans.
Simplify monthly payments
A debt consolidation loan eliminates multiple creditors so you only make payments to a single lender. This helps to avoid late and missed payments.
Fixed interest rates
Credit cards can have variable interest rates, meaning they can change over time. With a debt consolidation loan, the interest rate is fixed for the duration of the loan.
The interest rate will be determined by your credit score, the length of the loan, and the amount you borrow. Generally, the better your credit score, the better your interest rate.
Can I borrow more?
Loan amounts vary by lender, but some debt consolidation loans have a maximum of $100,000. Most consumers consolidate much less debt. According to a recent U.S. News survey, 60% of consumers consolidated less than $20,000.2
Alternatives to debt consolidation
Consolidating debt can be useful for some, but there are other strategies for managing debt that can be helpful for others.
Balance transfer credit cards
With a balance transfer, you move high-interest credit card debt to a new card with a lower rate. These cards typically come with an introductory 0% interest rate offer.
You generally need at least a “good” credit score to get approved for a balance transfer card. These cards also come with a fee, typically 3%-5% of the balance you want to move.
Debt management plans
Debt management plans (DMPs) can be a good choice for people with bad credit scores who might not qualify for a debt consolidation loan. With this type of program, you work with a credit counseling service to develop a repayment plan that you’ll be able to manage.
Once you have a plan, the service will typically negotiate with your creditors to try to get lower monthly payments or lower interest rates. From there, you pay the counseling service directly every month, and they take that to make your monthly payments for you.
DMPs can take three to five years to complete, and they often come with fees for the service. Fees can range from $20-$50.
The National Foundation for Credit Counseling (NFCC) is a nonprofit financial counseling organization with member agencies across the United States that offer DMPs.
The downside of using one of these services is it could show up on your credit report in the future. This could deter a lender from giving you a loan.
Credit card usage
Being mindful of how you use your credit card can help prevent you from falling into debt. Knowing the ways to pay off credit card debt can help you save money in the long run.
You can also try to renegotiate the terms of your debt by asking for a lower interest rate or asking for an adjusted due date. You may be able to manage your debt easier if all your due dates fall on the same day or close together.
Creating and maintaining a budget is a great way to get a sense of how much you can afford to put toward paying off your debt. With this in place, you can set a goal for when you want to have your debt paid off. See how much you’re spending compared with how much you earn to see if there are ways you can cut costs and put more toward debt repayment.
Use home equity
There are several ways you can leverage your home’s equity for a loan. This can be risky because it’s a secured loan, meaning your house would act as collateral if you’re unable to make timely payments.
- Home equity loan: Also known as a second mortgage, home equity loans offer a lump sum upfront with a fixed interest rate. The homeowner uses the equity in their home as collateral.
- Home equity line of credit (HELOC): Like a home equity loan, a HELOC also is secured by the value of a home. But instead of getting a lump sum upfront, you get a revolving line of credit like you would with a credit card. This gives you the funds you need when you need them, and you pay off your debt over time.
- Cash-out refinance: With a cash-out refinance, you rework your existing mortgage to be more than what you still owe on your home. Then you can use the loan to pay off the mortgage and keep the rest for whatever you’d like. You generally need to have at least 20% equity in your home for this option.
If you don’t want to go as far as a debt management plan or don’t qualify for one, you still can get services from a credit counseling agency. Some credit counseling agencies even offer some of their services free of charge.
A credit counselor can give you advice on how to improve your credit score and help you get a better understanding of your credit report. Credit counseling agencies often have relationships with creditors, allowing them to get lower interest rates.
Debt settlement is a more drastic step than debt management. For a price, debt settlement companies work with you to settle your debt for less than you actually owe. The amount is paid in a lump sum. But this can be a risky move.3
You’re asked to set aside a certain amount of money every month into an “escrow-like” account to eventually reach the amount of the settlement before paying it off. Debt settlement programs often tell their clients to stop making monthly payments to their creditors, which could force you to default and damage your credit score.
Debt settlement is considered a last resort before bankruptcy. Consider all other options before reaching this point.
Filing for bankruptcy stays on your credit report for seven to 10 years. So, bankruptcy could prevent you from qualifying for other loans in that timeframe. But in time, your credit will recover. If you’re seriously considering bankruptcy, contact a bankruptcy attorney to discuss your options.