Getting a debt consolidation loan with bad credit: How to do it

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In a Nutshell

If you’re struggling to pay off debt and you have bad credit, you might be able to get approved for a debt consolidation loan — but be careful. “Bad credit” loans typically come with drawbacks, including high interest rates.
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It’s tough to deal with debt, especially when you’re struggling with credit, too. Mounting debt may affect your credit scores negatively, and bad credit can make it difficult to qualify for lower-interest loans that could help you pay down debt sooner.

A debt consolidation loan may seem like the perfect solution to getting your monthly payments under control. But finding a debt consolidation loan with bad credit can be difficult. In fact, even if you’re approved for a debt consolidation loan with bad credit, you might not receive a better interest rate on the debt you’re consolidating. And you may wind up paying more in fees and interest.

It’s possible to get a debt consolidation loan with bad credit. But it’s important to be aware of the drawbacks, including high interest rates and other costs, that are typically associated with bad credit loans.

What is a debt consolidation loan?

A debt consolidation loan is a new loan that you apply for to pay off current debts, like credit card balances. The balances from your existing debt are transferred to the new loan, and you make payments on your new debt-consolidation loan.

When you’re looking for a debt consolidation loan, it is important to look for more favorable terms, such as a lower interest rate, compared to the terms associated with your current debt. The goal is to find loan terms and an interest rate that are more manageable for you.

Here are a few ways a debt consolidation loan could help you.

Go from multiple monthly payments to just one

Making several types of debt payments each month, whether you’re paying on multiple credit card balances or personal loans, can be difficult to manage.

Rather than risk losing track of all those monthly payments, a debt consolidation loan could let you make just one monthly payment instead of many, which may be easier for you to remember.

Possibly get a lower interest rate

A debt consolidation loan may have a lower interest rate than you’re currently paying on other debts. The average credit card interest rate in February 2023 was about 20.09%, according to Federal Reserve data. But the average interest rate for a 24-month personal loan, which can be used to pay off other debts, was just 11.48%.

Help your credit

If consolidating your debt allows you to pay credit card debt down more quickly, you may be able to improve your credit utilization rate — which may help boost your credit scores.

Another important factor in credit scoring is payment history — and with a debt consolidation loan, you could potentially improve your record. Rather than keeping track of multiple payments, a debt consolidation loan leaves you with just one payment to stay on top of every month.

What credit scores do I need to get a debt consolidation loan?

Different credit-scoring models have different ranges of what scores are generally considered poor, but scores 579 and below are typically considered poor in the FICO® Score 8 and FICO® Score 9 models. With scores in this range, it can be difficult to get a debt consolidation loan at all — let alone get one with favorable terms.

Using the same scoring models, scores between 580 and 739 are generally considered to be in the fair to good range. You’ll likely have a better chance of securing a debt consolidation loan with good terms in this range. Scores of 800 and above are generally considered “excellent” and put you in a better position when applying for a debt consolidation loan than if your scores were lower.

It’s important to keep in mind though, that your credit scores are just one of the factors that a lender considers when deciding on whether to approve you for a debt-consolidation loan.

Challenges of getting a debt consolidation loan with bad credit

You may face some significant obstacles when you’re looking for a debt consolidation loan with bad credit.

The first challenge is simply getting approved. If your credit scores are below a certain threshold, some lenders may not work with you. But because lenders typically consider a variety of factors (and not just your scores), including your credit history and debt-to-income ratio, you’re not necessarily ruled out if you have bad credit.

Take note: If you are approved for a debt-consolidation loan and you’ve struggled with credit, you may face higher interest rates than you would if you had strong credit.

Looking for a debt consolidation loan with bad credit

If you’re looking for a debt consolidation loan when you have bad credit, do your research to find a loan that works for you. Approaching the process with a plan can help.

1. Check your credit scores

First, take a close look at your credit scores. Knowing your scores could give you a better idea of which loans you can’t qualify for and which ones you might. Also, reviewing your credit reports could help you identify any errors that might be hurting your scores. You may even see opportunities to improve your credit.

2. Comparison shop

Once you have a good understanding of where your credit stands, start comparing terms offered by a variety of lenders. Getting quotes from multiple lenders can help you understand what options may be available.

Getting prequalified can also help you understand how likely you are to be approved for a certain loan. Prequalification can give you insight into the lender’s requirements and typically also would be a soft inquiry. That said, when you make the application, this would still be a hard inquiry.

If your credit isn’t great, you’ll need to search everywhere for the best loan terms. Before you rule out any lenders, be sure to check them out. Credit unions and online lenders may be good options.

Credit unions may be more flexible with loan requirements. Because credit unions focus on their members, it’s possible that they’ll place less weight on your credit scores than a traditional lender might. And you might be able to find some online lenders that are able to work with borrowers who have struggled with credit.

4. Consider a co-signer with good credit

A co-signer is somebody who will share responsibility for a personal loan. Consider asking a friend or family member with good credit and who’s willing to help you to co-sign your loan.

Having a co-signer may mean that you could qualify for a loan that you otherwise could not on your own. And even if you can qualify for a loan on your own, having a co-signer with good credit may help you qualify for a lower interest rate.

Alternatives to a debt consolidation loan

It’s important to know that debt consolidation isn’t the only way to deal with debts you’re struggling to repay. Here are some options that may help you pay down your current debt — without creating new debt.

  • Reach out to your current creditors. They may be willing to negotiate repayment terms that are more manageable for you, rather than see you default on your debt.
  • Consider credit counseling. A credit counselor could help you craft a debt-management plan to help you get out of debt faster — and credit counseling is usually free.
  • Consider a 0% intro APR balance transfer credit card. If you’re working to pay off credit card debt, consider balance transfer options with an introductory 0% APR credit card.
  • Look into a home equity loan. If you have equity in your home, you may be able to get a home equity loan or line of credit to pay off high-interest debt. Because the loan’s secured by your home, you may qualify for a lower interest rate. But be careful: If you default on your home-equity loan, the lender could take your home.

Bottom line

If you’re struggling to keep track of multiple debt payments each month or have high-interest debt that you’d like to refinance at a lower rate, a debt-consolidation loan might be an option for you — even if you have what creditors consider “bad credit.” But your credit may make it difficult to get favorable rates and terms on a debt-consolidation loan.

Before you commit to any loan, make sure to explore all of your options. Once you find a loan that works for you, be sure to always pay the agreed amount on time every month. This can help you begin to improve your credit over time.

About the author: Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. She especially loves to help young people learn how to set up their finances for a better future through her blog, … Read more.