At a Glance

Debt consolidation helps you combine multiple debts into just one, ideally with a lower interest rate. However, having bad credit can make qualifying for a debt consolidation loan very challenging.Below, we’ll review some options you could consider instead, including:

  • Home equity loan
  • HELOC
  • Cash-out refinance
  • Debt management plan
  • Balance transfer credit card
  • Debt settlement
  • Bankruptcy

What is debt consolidation?

Debt consolidation is when you take out a new loan in order to pay down high-interest debt. It can help you roll several payments into a single one each month and save money.

If you have bad credit, usually defined as a FICO score below 579, you’ll be more limited in your options, but there are still ways you can consolidate.

Can I get a debt consolidation loan with bad credit?

There are loans available for individuals with bad credit, though they usually have high interest rates. In some cases, the interest of your new loan could be greater than your current debt’s rate. A debt consolidation loan’s interest rate should be lower than the combined interest rate of your current debt.

Debt consolidation options for bad credit

If you have poor credit, there are plenty of debt consolidation options outside of personal loans.

Options for homeowners

Home Equity Loan

A home equity loan acts as a second mortgage and uses your home as collateral. If you fail to make your payments, the lender can foreclose on your house. You can usually secure a home equity loan even if you have bad credit since it’s less risky for the lender than other types of loans.

Home equity loans typically have lower rates than debt consolidation and in some cases are tax deductible. Home equity loans are not eligible for bankruptcy.

Home equity line of credit (HELOC)

A home equity line of credit gives you access to a line of credit that is backed by your house. It acts as a credit card, and similar to a home equity loan uses your home as collateral. You can spend what you take out on whatever you need, but the interest is tax deductible if you use it on home improvement costs.

Cash-out Refinance

A cash-out refinance uses your home equity to take out cash. However, you’re replacing your current mortgage with a new one, not adding a second mortgage. Lenders will allow you to take up to 80% of your home equity in cash.

Credit requirements for a cash-out refinance are lower than the requirements for a home equity loan. A cash-out refinance can give you a lower rate on your mortgage, but if you don’t make your payments you could lose your house.

Options for non-homeowners

Debt management plan (DMP)

Credit consolidation companies offer debt management plans, which help you set up a repayment plan and find a better interest rate. Your cards will get closed out, and you’ll pay one monthly rate to the consolidation company, which they then pay out to your creditors.

Having a bad credit score isn’t an issue for getting into a DMP, as credit scores aren’t factored into your acceptance. You’ll be able to consolidate your debt, though you will have to pay a monthly fee and won’t be able to take out any new credit until you’ve finished the program.

Balance transfer credit card

With a balance transfer, you take a high-interest balance and transition it to a card that has a lower interest rate. By moving your interest to a 0% or low interest APR card, you’ll be able to save money. If your credit is bad, this option might be a little tougher to qualify for.

Don’t forget that after an initial promotional period, your interest rate will increase to its normal level.

Last-resort options

Debt settlement

Debt settlement sends your accounts to collections. The company settling your debt will negotiate settlements with your creditors to lower the amount you owe, and you’ll have one payment monthly. You can’t do a debt settlement on all types of debt, i.e. homes and cars are exempt.

Debt settlement is very bad for your credit score. In addition, it’s possible you could get sued by the creditors if you take too long to pay the money back.

Bankruptcy

Bankruptcy is a legal process overseen by federal court, and is often a last resort to eliminating debt. While some or all of your debts will be eliminated, bankruptcy has long-term negative effects on your credit and can stay on your report for up to 10 years.

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