Can I Get a Debt Consolidation Loan with Very Bad Credit?

Can I Get a Debt Consolidation Loan with Very Bad Credit?

If you have bad credit, getting approved for a debt consolidation loan can seem impossible. Your credit score may be low because of missed payments, high balances, or other issues. You may feel like you’re stuck in a cycle of debt that you can’t escape.

But here’s the good news: You can get a debt consolidation loan, even with very bad credit. While it may take some extra effort, there are lenders who work with borrowers who have poor credit histories. A debt consolidation loan allows you to roll multiple debts into one new loan, potentially lowering your monthly payments and interest rate.

In this article, we’ll explain how debt consolidation loans work, who offers them for bad credit borrowers, and tips for improving your chances of approval. We’ll also look at the pros and cons of debt consolidation so you can decide if it’s the right debt payoff strategy for you.

What Is a Debt Consolidation Loan?

A debt consolidation loan brings together multiple debts into one new loan. This new loan pays off your existing accounts and gives you just one monthly payment to manage going forward.

Debt consolidation loans are usually unsecured personal loans. That means the loan isn’t backed by an asset like your home or car. Instead, the lender considers factors like your income, credit score, and current debt levels when deciding whether to approve you.

One big potential benefit of a debt consolidation loan is getting a lower interest rate. The average credit card interest rate is currently over 19%¹, while personal loans for both good and bad credit borrowers can have rates starting under 10%. Paying less interest each month can help you pay off your debt faster.

Other advantages of debt consolidation include:

• Simpler payments. You’ll make one payment instead of keeping track of multiple bills.
• Fixed repayment schedule. Personal loans have set monthly payments and terms, unlike credit cards.
• Potential credit boost. Making on-time payments can improve your credit over time.
• Lower monthly payments. If you qualify to extend your repayment term, your payments may go down.
• Interest savings. A lower rate saves money over the life of the loan.

Of course, debt consolidation also comes with risks, which we’ll explore later in this article.

Who Offers Debt Consolidation Loans for Bad Credit?

Traditional banks and credit unions typically only lend to borrowers with good credit — generally considered a credit score of 670 or higher. But these days you have more options for bad credit lending thanks to online lenders and peer-to-peer lending marketplaces.

Online lenders like Upgrade, LendingClub, Avant, and LendingPoint consider applicants with credit scores under 650 or even lower. They use factors besides your credit score to evaluate your ability to repay the loan.

Peer-to-peer lending sites like Prosper and LendingClub let individual investors fund loans. Investors may be more willing than banks to finance debt consolidation loans for borrowers with bad credit.

Some lenders also offer secured debt consolidation loans. These require you to pledge an asset like your car or savings account as collateral. Secured loans can help borrowers with very poor credit get approved when they may not otherwise qualify.

Tips for Getting Approved

While you can get a debt consolidation loan with bad credit, approval isn’t guaranteed. Lenders will look at factors like your income, existing debts, and credit history.

Here are some tips that could improve your chances of getting approved:

• Check your credit reports – Make sure there are no errors dragging down your scores. Dispute any inaccuracies with the credit bureaus.
• Pay down balances – Having high balances compared to your credit limits hurts your credit utilization rate.
• Become an authorized user – Ask a friend or family member with good credit to add you as a user on their credit card. Their positive history can help your score.
• Avoid new credit applications – Too many hard inquiries from applying for credit can worsen your credit situation.
• Pay all bills on time – On-time payments help demonstrate you can handle debt responsibly.
• Consider loan alternatives – If you’re denied, look into options like credit counseling or debt management plans.

Preparing your application strategically can also improve your chances:

• Shop around – Comparing loan offers helps you find the best rates and terms.
• Bring a co-signer – Adding a cosigner with good credit can improve your approval odds.
• Apply for a secured loan – Putting up collateral shows lenders you’re a serious borrower.
• Only consolidate balances you can’t quickly pay off – Leave out any debts you can knock out in a few months.

While boosting your credit score takes time, even an extra 20 or 30 points can make you look like a less risky borrower to lenders.

What Are the Cons of Debt Consolidation?

Combining your debts into one loan can make repayment easier, but debt consolidation loans do come with some drawbacks to consider:

• Application declines – With bad credit, you may face loan denials from lenders.
• High interest rates – Poor credit means paying more interest, reducing your potential savings.
• Prepayment penalties – Some lenders charge you extra for paying off your loan early.
• Longer repayment terms – Extending your loan length lowers payments but increases the total interest paid.
• Missed payment penalties – Some lenders hit you with fees and penalties for late or missed payments.
• Credit score dip – Too many loan applications in a short time can lower your credit score temporarily.

You’ll need to weigh these potential drawbacks against the benefits to decide if debt consolidation is your best path forward. Your other options for dealing with debt include credit counseling, debt settlement, debt management plans, or even bankruptcy in some cases.

Alternatives to Debt Consolidation Loans

If you want to consolidate your debts but can’t qualify for a personal loan, here are a few alternatives to consider:

• Balance transfer credit card – Transfer your balances to a card with a 0% intro APR to save on interest.
• Home equity loan – Use your home equity to qualify for a lower-rate consolidation loan.
• 401(k) loan – Borrow from your retirement savings and repay the money over 5 years.
• Credit counseling agency – Work with a non-profit counselor to set up a debt management plan (DMP).
• Debt settlement company – They negotiate with your creditors for reduced payoff amounts.
• Bankruptcy – As a last resort, Chapter 7 or Chapter 13 bankruptcy discharges qualifying debts.

Each option has pros and cons to weigh, but they provide alternative routes to becoming debt-free.

Is Debt Consolidation Right for You?

Here are a few signs that a debt consolidation loan may be a smart money move:

• You have high-interest debts like credit cards or payday loans.
• You struggle to keep track of multiple monthly payments.
• Your income is stable enough to afford a monthly loan payment.
• You have some available credit or assets to qualify for a loan.
• You need a lower interest rate to pay off your debts faster.

On the other hand, debt consolidation may not be the best fit if:

• You don’t expect your income to be stable in the near future.
• You can’t qualify for a loan with significantly better terms than your current debts.
• You’ve applied for too much credit recently.
• You need immediate debt relief from collection calls or lawsuits.
• You have an overwhelming amount of debt compared to your income.

Being realistic about your financial situation helps determine if consolidation will help or hurt. You may decide your best first step is repairing your credit or speaking to a credit counseling agency.

How to Apply for a Debt Consolidation Loan

If you want to move forward with a debt consolidation loan, here are some tips for applying:

1. Check your credit reports and scores so you know where you stand.
2. Research lenders and pre-qualify to find potential matches.
3. Compare loan offers to find the best rates and terms.
4. Complete loan applications with your chosen lenders.
5. Provide all required documentation like pay stubs, tax returns, and bank statements.
6. Wait for loan decisions and compare approval offers.
7. Accept the offer that makes the most financial sense for your situation.
8. Provide any other paperwork the lender requires to finalize loan approval.
9. Once approved, the lender pays off your debts directly and sets up your new consolidated loan.

This process can take anywhere from two days to a few weeks depending on the lender. Be prepared to wait a little longer than borrowers with good credit.

Alternatives to Getting a Debt Consolidation Loan

If you ultimately decide against a debt consolidation loan or don’t qualify, here are a few other strategies to reduce your monthly payments and interest costs:

• Contact creditors for lower interest rates or more favorable repayment terms. They may be willing to work with you.
• Prioritize paying off debts with the highest interest rates first while making minimums on the others.
• Use a debt payoff calculator to create a plan that works for your budget.
• Cut expenses temporarily so you can put extra money toward debt repayment.
• Sell assets like electronics, jewelry, collectibles, or a second car.
• Boost your income with a side gig, promotion, or new job.

The most important thing is to stay committed to becoming debt-free, even if your path takes longer than expected. Eventually your credit will improve, making other borrowing options available.

The Bottom Line

Bad credit doesn’t have to keep you stuck in debt forever. While it may take more effort, you can qualify for a debt consolidation loan despite having poor credit.

Focus on researching lenders, comparing offers, and boosting your credit score. With persistence and the right loan terms, debt consolidation can provide the fresh start you need to pay off your balances once and for all.

1. Federal Reserve, Consumer Credit – G.19, September 2022^[back]