Debt consolidation is a debt payoff strategy that involves taking out a new loan (often a personal loan) to pay off high-interest debts in an effort to streamline monthly payments and save money on interest.
While it can be challenging to get a debt consolidation loan with a bad credit history, you aren’t necessarily out of luck. Some lenders look at factors beyond credit score, such as your income and job history. There are also several actions you can take to increase your odds of getting approved for a debt consolidation loan. Here’s what you need to know.
Table of Contents
Key Points
• Before consolidating debt with bad credit, it’s a good idea to order free copies of your credit reports and review them for errors and red flags.
• Finding flexible lenders and providing collateral can help you find a debt consolidation loan with bad credit.
• Adding a cosigner can increase loan approval chances and offer better terms, but poses risks to both parties’ credit.
• Home equity loans may offer lower interest rates and fixed payments, but using a home as collateral can be risky.
• Nonprofit credit counseling and DIY debt management plans can also help simplify and reduce debt.
How to Get a Debt Consolidation Loan With Bad or Average Credit
Even with fair or poor credit, lenders may still consider you for a debt consolidation loan. Here are a few ways to increase your chances of getting approved.
Check Your Credit Reports
Before you apply for a debt consolidation loan, it’s a good idea to comb through your credit reports to see if there are any errors or inaccuracies that could be negatively impacting your score. You’re entitled to a free credit report every week from each of the three major credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com.
If you notice any incorrect information (such as wrong accounts, incorrectly reported payments, inaccurate credit limits, or partial information) on any of your reports, you’ll want to reach out to the appropriate credit union and file a dispute.
Reading your credit reports can also give you a sense of your overall credit health and see where there may be areas for improvement.
Shop around
Not all lenders treat bad credit the same way. Some specialize in working with borrowers with lower scores, while others may be more flexible in their qualification criteria. Explore loan options from banks, credit unions, and online lenders. If possible, try to prequalify online. This can give you an idea of what rates and terms you may be able to get but only requires a soft credit pull, which won’t impact your credit score.
Apply with a Cosigner
If you have a friend or family member with good credit willing to cosign the loan, your approval chances can improve significantly. A cosigner agrees to repay the loan if you default, reducing the lender’s risk. Keep in mind, though, that missed payments will impact both your credit and your cosigner’s, so it’s a serious commitment for both parties.
Provide Collateral
Secured personal loans, which require you to provide collateral (such as a vehicle or property) to back up the loan, can be easier to get if you have bad or average credit. The downside is that you’re putting your asset on the line. If you run into trouble repaying the loan, the lender can seize the collateral to get their money back.
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Build Your Credit Score
If you’re not in a hurry to consolidate your debt, you may want to focus on building your credit profile before you apply for a consolidation loan. Steps that can help include paying your bills on time, reducing credit card balances, not taking on any new debt, and (as mentioned) addressing any errors on your credit report.
Even small improvements in your credit file can help you qualify for a better interest rate on a debt consolidation loan.
Where to Get a Debt Consolidation Loan with Bad Credit
Trying to find consolidation loans with a bad credit history can feel overwhelming. Here are some good places to look.
Local Banks and Credit Unions
Traditional banking institutions tend to be stringent in their lending criteria. However, if you already have a relationship with a local bank or credit union, they may be willing to work with you based on your overall financial profile, and not simply look at your credit score. Banks and credit unions are also more likely to offer secured loans, which may help you get a better rate.
Online Debt Consolidation Lenders
Online lenders tend to have more flexible qualification criteria for personal loans than banks, and can be a good place to look for debt consolidation loans with bad credit. These alternative lenders also typically offer a simpler application process and are faster to fund than traditional lenders. Just keep in mind that some online lenders charge relatively high rates for borrowers with bad credit, which can make consolidating debt less appealing.
To make sure consolidating debt is worthwhile, use an online debt consolidation calculator to see exactly how much you can save.
Payday Lenders
Payday loans can be easy to get when you have bad credit, but they’re not an ideal choice for consolidating debt. These loans generally come with sky high interest rates — often approaching 400% annual percentage rate (APR) — that can trap borrowers in a cycle of debt. Only consider payday loans as a last resort, and only if you’re certain you can repay the loan on time.
Peer-to-Peer Lending Platforms
Peer-to-peer lending platforms, such as Prosper, Upstart, and Kiva, match borrowers with individual investors willing to fund their loans. Potential lenders will often look at more than just your credit score, including employment status and income, which can make personal loans more accessible to borrowers with less-than-stellar credit.
Nonprofit Financial Assistance Programs
Though not technically a loan, some nonprofit credit counseling agencies offer debt management plans (DMPs), which are another way to consolidate debt with bad credit.
For a small fee, the agency will negotiate with your creditors to lower your interest rates and fees and establish a payment plan that works for you. They then consolidate your payments into one monthly amount. You make a single payment to the counseling agency, which distributes the funds to your creditors.
Pros and Cons of a Debt Consolidation Loan
Getting a consolidation loan to pay off debt isn’t a one-size-fits-all solution. It can be a powerful tool, but it also has its drawbacks.
Pros
• Simplified payments: Instead of juggling multiple creditors, you’ll only have one monthly payment, which can make budgeting easier.
• Lower interest rates: If you qualify for a loan with a better interest rate than your existing debts, you could save money in the long run.
• Can help you rebuild credit: Timely payments on your new loan will help you create a positive payment history, which is a key factor in your credit scores.
• Reduced stress: Managing a single loan is often less overwhelming, especially when paired with a structured repayment plan.
Cons
• High interest for bad credit: If your credit is poor, the loan’s interest rate may be almost as high —or higher—than your current debts.
• Added fees: Some loans come with origination fees, prepayment penalties, or other charges that add to your total debt.
• Risk of default: Consolidating doesn’t eliminate your debt — it just reshapes it. If you continue spending without changing your financial habits, you could run into trouble repaying your consolidation loan.
• Collateral risk: If you choose a secured loan and can’t keep up with payments, you risk losing your property or assets.
Debt Consolidation Alternatives
Debt consolidation isn’t your only debt payoff strategy. Depending on your circumstances, other solutions might be more cost effective or less risky.
Home Equity Loans
If you own a home and have built up significant equity, you may be able to take out a home equity loan or home equity line of credit (HELOC) to pay off your existing debts. These loans typically have lower interest rates than unsecured personal loans. However, your home becomes collateral, which means that if you default, you could face losing it. Only consider this option if you’re confident in your ability to repay.
Balance Transfer Credit Cards
A balance transfer credit card allows you to move existing debt from one or more credit cards or loans to a new credit card, ideally one with low or a 0% introductory APR. If you can pay off your balance before the promotional rate expires, you could save significantly on interest. Just keep in mind that you typically need good or better credit to snag a 0% promotional rate.
DIY Debt Management Plans
If you want to tackle your debt on your own, start by making a list of all your existing debts, interest rates, and balances, then choose a strategy — such as the snowball or avalanche approach — to pay them down.
With the avalanche method, you make extra payments on the credit card with the highest interest rate first, while making minimum payments on the others. Once the highest-rate card is paid off, you funnel those extra funds toward the card with the next-highest rate, and so on. This strategy minimizes the amount of interest you’ll pay over time.
With the snowball method, you put extra payments toward the card with the smallest balance first, while making minimum payments on the others. When that card is cleared, you focus on paying off the next-smallest balance, and so on. This gives you quick wins and a psychological boost, which can help you stay motivated.
Debt Settlement
If you’re more than 90 days past due on a debt and suffering financial hardship, you might consider debt settlement. This is a strategy where you negotiate with your creditors to lower your debt in return for one lump sum payment. You can try this yourself or hire a debt settlement company, though the latter often charges high fees.
Just keep in mind that settling a debt can negatively affect your credit file, since settled accounts stay on your credit report for up to seven years. However, for those overwhelmed by debt, it may be a better option than facing ongoing collections or bankruptcy.
The Takeaway
Consolidating debt with a bad credit history can be challenging, but it’s not out of the realm of possibility. With the right strategy, you can streamline your payments, potentially reduce your interest rates, and get back on the path to financial stability.
Start by reviewing your credit reports, exploring all your options, and considering both the short-term benefits and long-term consequences of your decision. Whether through a personal loan, a debt management plan, or another method, the key is to take action and commit to improving your financial habits over time.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Can I qualify for a debt consolidation loan with a credit score under 600?
Yes, it’s possible to qualify for a debt consolidation loan with a credit score under 600, but options may be limited and interest rates could be high. Lenders view sub-600 credit as risky, so you may need to show proof of stable income or offer collateral. Some online lenders and credit unions have more flexible borrowing criteria. Comparing offers and considering a cosigner can also improve your chances of approval and more favorable terms.
Will applying for a debt consolidation loan hurt my credit score?
Applying for a debt consolidation loan can temporarily impact your credit score due to the hard inquiry during the application process. However, the effect is usually small and short-lived. If you’re approved and use the loan to pay off high-interest debt, it can positively impact your credit file over time by lowering your credit utilization and adding to your positive payment history.
How much can I borrow with bad credit?
With bad credit, you may still be able to borrow between $1,000 and $50,000. The exact amount you can get with a personal loan varies by lender and is influenced by factors like your debt-to-income ratio and employment history. Expect higher interest rates and possibly shorter repayment terms. Shopping around and considering secured loans or a cosigner can help you access better loan amounts and terms.
Is a personal loan a good way to consolidate debt?
A personal loan can be a good way to consolidate debt if it offers a lower interest rate than your existing debts. It can also simplify repayment by turning multiple payments into one fixed monthly payment. However, approval depends on your credit score and financial stability. If the loan has high fees or interest, it may not be worth it. Always compare offers and check the total repayment amount before committing.
What’s the best alternative to a debt consolidation loan if I’m denied?
If you’re denied a debt consolidation loan, alternatives include working with a credit counseling agency to set up a debt management plan (DMP), negotiating directly with creditors for lower payments, or considering a secured loan using collateral. A balance transfer credit card with a low or 0% promotional rate (if you qualify) can also be effective. In more serious situations, debt settlement or bankruptcy might be last-resort options. Each alternative has pros and cons, so it’s important to assess your financial situation carefully.
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