Debt Consolidation Loans for Those With Bad Credit — Frequently Asked Questions

Debt Consolidation Loans for Those With Bad Credit — Frequently Asked Questions

If you have bad credit but need to consolidate debt, you probably have a lot of questions about your options. Getting approved for a debt consolidation loan with less-than-perfect credit can be challenging, but it is possible. Here we’ll walk through some of the most frequently asked questions about debt consolidation loans for bad credit borrowers to help you make an informed decision.

What is debt consolidation?

Debt consolidation simply means combining multiple debts into one new loan. For example, if you have five different credit cards totaling $15,000, you could apply for a debt consolidation loan for $15,000 to pay off the credit cards all at once. Now you only have to make one monthly payment on the consolidation loan rather than five separate payments.

The goal is to simplify and streamline your finances by replacing multiple debt payments with just one. Debt consolidation can also potentially lower your interest rate, reducing the total cost of your debt. But it’s important to understand consolidation doesn’t erase your debt — you still owe the full amount, just to a new creditor.

How does debt consolidation work for bad credit?

The process of getting a debt consolidation loan with bad credit is essentially the same as it would be for someone with good credit. You fill out a loan application with a lender, the lender reviews your credit report and financial information, and they make an approval decision. Here are some key points about debt consolidation loans for bad credit borrowers:

• You may need to provide more documentation of your income and expenses.
• Interest rates will likely be higher than they would be with good credit.
• Loan amounts may be lower than requested.
• Approval is less guaranteed – bad credit scores increase the risk of denial.
• You may need to put up collateral or get a cosigner.

While getting approved is harder, thousands of people with bad credit do receive debt consolidation loans every year. The key is being prepared and working to improve your credit first if needed.

How can I get a debt consolidation loan with bad credit?

Here are some tips for getting approved for a debt consolidation loan when you have bad credit:

1. Check your credit reports and fix any errors to improve your scores.
2. Pay down balances on credit cards and other revolving debt.
3. Shop around with online lenders and non-bank lenders.
4. Be prepared to provide documentation like pay stubs, tax returns, and bank statements.
5. Consider putting up collateral like your car or home equity.
6. Ask a creditworthy cosigner to apply with you.
7. Apply for a secured debt consolidation loan.

Taking some time to boost your credit score even by 50-100 points can significantly improve your chances of getting approved and lower your interest rate. Non-bank and online lenders also tend to be more willing to work with bad credit borrowers compared to traditional banks.

Should I get a secured or unsecured debt consolidation loan?

Secured debt consolidation loans require you to provide collateral like your home or car to back the loan. This gives the lender more assurance they will get repaid. Unsecured loans are based solely on your creditworthiness. Here are some key differences:

• Interest rates – Secured loans often have lower rates, but not always.
• Qualifying – Those with very poor credit may only qualify for secured loans.
• Risks – With secured loans, your collateral can be seized if you default.
• Amounts – You can sometimes borrow more with a secured loan.

In general, try to get an unsecured loan if you can qualify, as it is less risky. But secured loans are an option if you have been repeatedly denied for unsecured consolidation loans.

Should I use a home equity loan or line of credit to consolidate debt?

Borrowing against your home equity via a home equity loan or HELOC is one option for securing a debt consolidation loan. The benefits include low interest rates and the ability to deduct the interest on your taxes. However, there are some downsides:

• The lending process takes longer.
• Closing costs and fees are high, around 2-5% of the loan amount.
• Your home is at risk if you default on the loan.

A home equity loan makes sense if you need a very large loan amount or have significant equity built up. But for smaller debts, an unsecured personal loan is often easier and less risky. Shop around and compare rates and fees before deciding.

What credit score do I need for debt consolidation?

There isn’t one single minimum credit score needed to qualify for debt consolidation, as each lender sets their own requirements. Here are some general credit score guidelines:

• Very good (740+) – You’ll get the best rates from most lenders.
• Good (670-739) – Qualify for reasonable rates from many lenders.
• Fair (580-669) – Still options, but expect higher than average rates.
• Poor (below 580) – Loan approval will be very difficult.

Online lenders and non-banks are often willing to work with credit scores in the fair range, which traditional banks shy away from. Even a fair credit score can mean a double-digit interest rate, so try to get your score as high as possible first.

Should I consolidate my student loans?

Federal and private student loans can be included in a debt consolidation loan, but it’s not always the best idea. Here are some factors to consider:

• You will lose flexible federal repayment options like IBR and loan forgiveness programs.
• Interest rates on federal consolidation loans may be higher than your current rates.
• Variable rates on private loans get converted to fixed rates, which can be good or bad.
• Weigh giving up federal protections vs. simplifying payments with consolidation.

Run the numbers carefully before consolidating federal or private student loans — it can increase your long term costs in some cases. Consolidating credit card and other high interest rate debt often makes more sense.

What are the risks of debt consolidation loans?

While debt consolidation can make repaying debt more manageable, there are some potential risks to be aware of:

• Higher interest rate if you have bad credit.
• Losing positive payment history on old accounts when you close them.
• Credit score drop from hard inquiries and lower credit mix.
• Fees for late payments may be higher than your old accounts.
• Collateral being seized for secured loans if you default.

To avoid pitfalls, be very careful about taking on additional debt right after consolidation. And make sure your budget allows you to make the new consolidated loan payment each month — otherwise you could end up in deeper debt.

How can I improve my chances of approval?

If you have been denied for debt consolidation loans in the past, there are steps you can take to improve your odds of getting approved down the road:

1. Pay down existing debts as much as possible first.
2. Work on improving your credit by paying bills on time, lowering utilization, and fixing errors.
3. Ask previous creditors about goodwill deletion of negative marks.
4. Build your savings to show lenders you can handle financial hurdles.
5. Apply with a cosigner who has excellent credit.
6. Consider a secured loan by putting up collateral.

Even increasing your credit score by 50 points or getting your utilization below 30% could be enough to get approved the next time you apply. Don’t get discouraged by initial denials — improving your financial profile can make a difference.

What information do I need to apply?

Having all your financial documentation ready will help ensure a smooth loan application process. Here are some tips on what to gather in advance when applying for a debt consolidation loan:

• Identification like your driver’s license and Social Security card
• Employment information such as your job title, income, and time at your job
• Account numbers, balances, and payment amounts for all debts you want to consolidate
• Bank account and routing numbers if applying online
• Tax returns and W-2s to document your income
• Pay stubs covering the last 30 days of employment
• Your monthly housing payment and expenses
• Contact info for references like your landlord or employer

For secured loans, you will also need documentation on assets you want to use as collateral like your home value or car title. Being prepared with all required paperwork can help your loan get processed faster.

What are alternatives to debt consolidation loans?

If you are unable to qualify for a debt consolidation loan, there are some other options to consider:

• Credit counseling – Get help negotiating with creditors for lower rates and payments.
• Debt settlement – Lump sum settlements for less than you owe.
• Balance transfer cards – Consolidate credit card debt onto a new card at 0% APR.
• Debt management plan – Make one payment to a credit counseling agency each month.
• Bankruptcy – Wipe out eligible debt entirely through Chapter 7 or 13 bankruptcy.

Each option has pros and cons to weigh based on your specific situation. Consulting an accredited non-profit credit counseling agency is recommended to review all of your debt relief options.

Key takeaways

Getting a debt consolidation loan with bad credit takes some extra effort, but can still pay off in the long run. Improving your credit score, considering secured loans or cosigners, and shopping around with online lenders can help increase your chances of getting approved. Weigh the risks carefully and have a plan to avoid getting back into debt before moving forward.