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 if you have bad credit, 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.
How to Get a Debt Consolidation Loan With Bad or Average Credit
Even with fair or poor credit, you can often still qualify 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 (you have three) to see if there are any errors that could be negatively impacting your score. You can check your credit report for free at each of the credit reporting bureaus credit bureaus (Experian, Equifax, and TransUnion) using 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. By law, the credit bureaus usually have up to 30 days to review your claim and respond.
You can find personal loans for debt consolidation at local banks, national banks, credit unions, and online lenders. To find the best deal, it’s a good idea to shop around and compare qualification requirements, loan amounts, repayment terms, and fees from multiple lenders. You can often prequalify for a loan online without impacting your credit score.
Apply with a cosigner
Having a cosigner with a good credit history can significantly improve your chances of getting approved for a personal loan for debt consolidation. It can also potentially help you get approved for a larger loan amount and better rates. A cosigner agrees to take responsibility for the loan if you default, which significantly reduces the risk to the lender.
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.
Build your credit score
If you’re not in a hurry to consolidate your debt, you may want to focus on improving your credit before you apply for a consolidation loan. Steps that can help include paying your bills on time, reducing credit card balances, and (as noted above) addressing any errors on your credit report.
You might also consider signing up for a service where your rent payments are reported to the credit bureaus. In turn, this could help build your credit (however, there may be a fee for this service).
Where to Get a Debt Consolidation Loan with Bad Credit
Trying to find consolidation loans for bad credit can feel overwhelming. Here are some places to start your search.
Local Banks and Credit Unions
Traditional banks and credit unions 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. You might want to talk to a loan officer about getting a personal loan to consolidate your debt and what rates and terms you could potentially qualify for.
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 for bad credit. These alternative lenders also typically offer a simpler application process and are faster to fund than traditional lenders. While rates tend to be higher, some online lenders will offer competitive rates on personal loans.
Payday lenders should be approached with caution due to their sky high interest rates and short repayment terms. This type of personal loan should be considered as a last resort if other options are not available.
How to Apply for a Debt Consolidation Loan
To apply for a personal loan to consolidate your debt, you typically need to provide the following information in your application:
• Personal information
• Employment information
• Income information
• Collateral or cosigner information (if applicable)
It’s helpful to gather these documents:
• Government-issued ID (i.e., driver’s license, passport)
• Proof of residence
• Pay stubs
• Bank statements
The lender will look over your application and likely perform a hard credit check, which can have a small, temporary negative impact on your credit score. They will typically take these qualification criteria into consideration:
• Credit score
• Debt-to-income ratio
What Are the Benefits of a Debt Consolidation Loan?
The benefits of getting a debt consolidation loan include:
• Simplified finances Combining multiple debts into one payment can make it easier to manage your finances and reduce the risk of missing payments.
• Lower interest rate If you can secure a debt consolidation loan with a lower interest rate than your existing debts, you can save money on interest charges over time.
• May help improve your credit Making regular, on-time payments towards your consolidated loan can positively impact your credit score over time.
Debt Consolidation Alternatives
If you’re not entirely sold on getting a debt consolidation loan or don’t think you’ll get approved because of your credit situation, here are some other options to consider.
• Credit counseling You might want to work with a nonprofit credit counseling agency to create a personalized debt management plan and receive financial guidance. These agencies reach out to the creditors and lenders on your behalf and try to negotiate for a lower rate. Instead of paying your creditors directly, you would pay the counseling service each month.
• Debt settlement It may be possible to negotiate with your creditors to settle your debts for less than what you owe. However, this option may have a negative impact on your credit.
• Balance transfer credit card If you qualify for a credit card with lower interest rate or a promotional 0% APR period, you might want to transfer your high-interest credit card balances to this card.
• Manage it yourself To tackle your debt on your own, you’ll want to make a list of all your existing debts, interest rates, and balances, then choose a DIY debt payoff plan, such as the snowball or avalanche method, to pay them down.
• Home equity loan If you own a home and have significant equity in it, you may be able to take out a home equity loan to pay off your existing debts. This isn’t technically a debt consolidation loan, but you might be able to reduce the amount of interest you’re paying because your home secures the loan.
Debt consolidation can be a valuable tool to simplify your finances and work towards becoming debt-free. While it may be challenging to get a debt consolidation loan with bad credit, it’s not impossible. By exploring different lenders, improving your credit profile, and considering collateral or a cosigner, you can increase your chances of approval.
If you’re interested in exploring your debt consolidation options, SoFi can help. With a low fixed interest rate on loan amounts from $5K to $100K, a SoFi personal loan for debt consolidation could substantially lower how much you pay each month. Checking your rate won’t affect your credit score, and it takes just one minute.
Photo credit: iStock/Vladimir Vladimirov
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