How To Get A Debt Consolidation Loan With Bad Credit
Debt consolidation is a debt management strategy that allows you to combine multiple debts into a single payment. Having one account can be easier to manage. Also, if you have higher than average interest rates due to bad credit or credit card debt, it could help you lower your average rate.Â
One of the most common ways to consolidate debt is to take out a debt consolidation loanÂ â a personal loan used to pay off multiple creditors. Although it may be tough to get this type of loan with bad credit, there are several actions you can take to increase your loan approval odds. Plus, there are alternative options to consider.
Benefits of a debt consolidation loan
Someone might get a debt consolidation loan for one of several reasons. The biggest benefits of a debt consolidation loan include:
- Simplified finances: A debt consolidation loan rolls multiple monthly payments into one. Having only one lender and one monthly bill to worry about could help you pay off your debt more consistently and avoid missed payments, which lower your credit score.
- Lower interest rate: Itâs generally only wise to get a debt consolidation loan if you can get a better interest rate than what youâre paying on your debt now. If youâre paying an average of 16 percent to 20 percent on your credit cards and you can get a debt consolidation loan for 14 percent APR, youâll save money overall.
- Fixed payment: Most debt consolidation loans have fixed interest rates and a set repayment term, so your monthly payment will be the same every month â unlike monthly payments on credit cards.
How to qualify for a debt consolidation loan
Every lender sets its own requirements for borrowers looking for debt consolidation loans. However, every lender will look at your credit score, income and debt-to-income ratio to determine how capable you are of repaying your loan. Often youâll need a credit score of around 650, although bad-credit debt consolidation lenders exist; these lenders may accept credit scores of 600 or even less. Just remember that the lower your credit score, the higher your interest rate.
4 steps to getting a debt consolidation loan for bad credit
If youâre struggling to get out of debt and think a debt consolidation loan can help, youâll likely have to have a credit score in the mid-600s, a history of on-time payments and sufficient income to qualify. However, every lender has its own requirements. Start with the following steps to help you find the right personal loans for debt consolidation and boost your chances of approval.
1. Check and monitor your credit score
Lenders base loan decisions largely upon the condition of your credit. Generally, the lower your credit score, the higher the interest rates lenders will offer you on financing. To qualify for a debt consolidation loan, youâll have to meet the lenderâs minimum requirement. This is often in the mid-600 range, although some bad-credit lenders may accept scores as low as 580.
Many banks offer free tools that allow you to check and monitor your credit score. Once you know your credit score, itâs easier to identify lenders that may be willing to work with you. Not only are there lenders that specialize in loans for people who have bad credit, but many list credit score requirements on their websites.
Takeaway:Â Check with your bank or credit card issuer to see if it offers tools that allow you to check your credit score for free.
2. Shop around
Itâs rarely a good idea to accept the first loan offer you see. Instead, do your research and compare loan amounts, repayment terms and fees from multiple sources, including local banks, national banks, credit unions and online lenders. This process can take time, but it might save you hundreds, if not thousands, of dollars.
The easiest starting point may be online lenders because you can often view your rates with a soft credit check, which wonât hurt your credit score. However, it may also be worthwhile to check offerings with your existing bank; if you have a good relationship with a bank or credit union, it may be more willing to overlook below-average credit.
Takeaway:Â Compare your loan options from multiple lenders to find the best debt consolidation loan for your needs. Go to each lenderâs website to learn about its products and qualification requirements.
3. Consider a secured loan
Personal loans for debt consolidation are typically unsecured, meaning they donât require collateral. If youâre having a hard time getting approved for an affordable unsecured debt consolidation loan, a secured loan might be worth considering.
Secured loans require some form of collateral, such as a vehicle, home or another asset. The collateral usually has to be worth enough to cover the loan amount if you default. Because of this, itâs typically easier to get approved for a secured loan than an unsecured one, and you may even qualify for a better interest rate.
Takeaway: To increase your loan approval odds and chances of landing a lower rate, shop around for a secured personal loan.
4. Wait and improve your credit
If youâve tried everything and canât find a loan that will help you save money, it may be best to hold off and take some time to establish a better credit score.
Make it a goal to pay your monthly debts on time every month for several months in a row. Itâs also a good idea to focus on paying down credit card balances and eliminating all nonessential monthly expenses, such as subscriptions and eating out frequently.
âMake a short-term plan that ensures youâre consistently allocating money towards debt payments every month,â says Steve Sexton, CEO of Sexton Advisory Group. âOnce youâve built momentum for a month or two, request a meeting with your bank or credit union to review your efforts and apply for a debt consolidation loan. Youâll have better luck with a bank or credit union vs. an online lender because you can show that youâve already started taking the steps to paying down your debt and correcting the issue.â
Itâs also a good idea to get a copy of your three credit reports, which you can do for free once a year â or weekly through April 2022 through AnnualCreditReport.com â and check for errors. If you find any, you can dispute them with the three credit reporting agencies, Equifax, Experian and TransUnion.
Takeaway: To increase your chances of receiving a lower rate, take these steps to improve your credit score: Pay your debt on time, pay off as much credit card debt as possible and review your credit reports for errors.
Where to get a debt consolidation loan with bad credit
With so many lenders out there, it can be overwhelming trying to decide where to begin. Here are some good places to start your search.
Credit unions and local banks
Local banks and credit unions will typically check your credit when you apply for a personal loan, just like any other lender. Yet these local financial institutions may be willing to offer you more leeway if your credit isnât in great shape, particularly if youâve already built a positive relationship with them.
If youâre a customer of a local bank or a member of a credit union, you can talk to a loan officer about whether you qualify for a personal loan â and what the rate and terms are, if you do. The institution may look beyond your low credit score and take into account your entire financial history, personal circumstances and relationship with the bank or credit union.
Online lenders are good places to look for debt consolidation loans if you have bad credit, as they may be more likely to approve you for a bad-credit loan than a traditional brick-and-mortar bank.
With an online lender, you can often:
- Compare rates without impacting your credit score.
- Apply quickly and easily, without lots of paperwork or the need to visit a branch in person.
- Get funds within a week, or even in as little as one business day.
âMost online lenders will be more flexible in providing these types of loans,â says Ash Exantus, director of financial education at BankMobile, an online bank.
With that said, online lenders frequently charge high APRs for bad-credit debt consolidation loans. You also have to watch out for origination fees that could add to your overall cost of financing and cut into your loan proceeds.
In particular, when reviewing online lenders for a potential debt consolidation loan, itâs important to know whether the company youâre considering is a direct lender or a third-party lender, Sexton says. âWorking with a third-party lender can sometimes involve additional costs and fees, so it could benefit you to seek a direct lender to avoid these costs.â
If youâre considering debt consolidation loans for bad credit, here are some online lenders you may want to check out:
- LendingClub doesnât state a minimum credit score requirement, but does offer the ability to apply with a co-borrower. APRs range from 7.04 percent to 35.89 percent on debt consolidation loans from $1,000 to $40,000.
- Upstart does not have a minimum credit score requirement. Qualified borrowers may be able to take out loans from $1,000 to $50,000 with an APR range of 3.22 percent to 35.99 percent.
- Avant doesnât state a minimum credit score. However, the company says that most customers who receive loans have a score above 600. If you qualify for financing, you may be able to borrow $2,000 to $35,000 at an APR between 9.95 percent and 35.99 percent.
- OneMain Financial doesnât specify a minimum credit score on its website, but it has a track record of working with borrowers who have fair and poor credit. The APR range on debt consolidation loans with OneMain Financial is 18 percent to 35.99 percent, and borrowers may qualify for loans from $1,500 up to $20,000.
Summary of the best bad-credit debt consolidation loan options
|Lender||Minimum credit score||APR range|
|Upstart||No minimum requirement||3.22%â35.99%|
|OneMain Financial||Not specified||18%â35.99%|
How to manage your debt consolidation loan
Once youâve obtained the funds from a debt consolidation loan, itâs important to manage the money responsibly. Here are some ways to help pay off your debt consolidation loan without racking up new debt.
Create a budget
After being approved for a loan, draft a budget outlining how you will repay the money each month, ensuring that youâll be capable of doing so.
âKnow ahead of time how much youâre going to have to pay each month,â Exantus says. âIf the amount that youâre going to pay is not conducive to your current budget, then it would not make sense to proceed with a debt consolidation loan.â
Alternatively, you may want to immediately reduce some of your current discretionary expenses to ensure that you have enough cash on hand to repay your loan each month.
Pay off all debt immediately
Once the funds from the consolidation loan have arrived in your account, the first thing you should do is pay off all of your debt.
âSome people will receive the money and proceed to use it for other purposes, or will fail to pay off the entirety of their debt,â says James Lambridis, CEO of DebtMD. âThis will only put you in a worse off financial situation.â
Set up automatic payments
Once you have your debt consolidation loan, see if your lender offers autopay. Many do, and some will even give you a discount for setting it up. Itâs a good way to potentially lower your interest payments if your poor credit resulted in a high rate. It will also help keep you on track â especially important for your credit, since making timely payments on your loan is one of the best ways to raise your credit score.
Resolve any spending issues
Finally, youâll need to acknowledge and resolve any ongoing spending issues you may have. Without addressing the behavioral money patterns that caused the problem in the first place, itâs easy to fall right back into debt, Sexton says.
This includes trying not to reach for those credit cards again once theyâve been paid off, as you donât want to end up back at square one.
Alternatives to a debt consolidation loan
Debt consolidation may not be the best option for everyone. If you canât qualify for a debt consolidation loan with a lower interest rate than youâre currently paying, you might want to consider some of these alternatives instead.
There are a few ways to alter your financial plan without involving third parties. To start tackling your debt, you can:
- Overhaul your budget. Compare how much youâre spending with how much you earn and see where you can cut costs to free up more money for debt elimination.
- Renegotiate the terms of your debt. If youâre struggling to meet your minimum payments, your lenders might be willing to lower your interest rate or work with you in other ways.
- Ask for a due-date adjustment. You might be able to schedule all of your payment due dates near the same day. While this isnât the same as consolidating your debt, it may help you keep track of your obligations more easily.
Debt management plan (DMP)
The National Foundation for Credit Counseling (NFCC) is a nonprofit financial counseling organization with member agencies around the country that offer debt management plans (DMPs).
In a way, DMPs are another type of debt consolidation for bad credit. While in the program, you make one lump-sum monthly payment to your credit counseling agency that covers multiple bills for the month.
The agency, in turn, pays each of your creditors on your behalf (generally at a lower negotiated interest rate). Most debt management plans take three to five years to complete.
That said, going through this process typically results in a notation on your credit report that youâre on a debt management plan. Though the notation will not impact your credit score, new lenders may be hesitant to offer you new lines of credit.
If you own a home and have significant equity in it, you may be able to take out a home equity loan to consolidate your debt. A home equity loan isnât technically a debt consolidation loan, but it might help you score a low interest rate, because the loan is secured by your home.
Just keep in mind that while using your homeâs equity may help you qualify for financing and possibly secure a lower interest rate, thereâs significant risk involved as well. If you canât keep up with the payments, you could risk losing your home to foreclosure. Itâs best to pursue this option only if youâre certain that you wonât have problems repaying the debt.
Ways to leverage your home equity for financing include:
- Home equity loan. Sometimes called a second mortgage, a home equity loan is a lump-sum, fixed-rate loan that homeowners can take out using the equity in their homes as collateral.
- Home equity line of credit (HELOC). A HELOC is another type of financing that is secured by the value of your home. Rather than borrowing a lump sum at a fixed interest rate, you take out a line of credit â similar to a credit card. This gives you access to funds whenever you need them, up to a maximum borrowing limit. As you pay down your balance, you can borrow up to that limit again.
- Cash-out refinance. With a cash-out refinance, you take out a new mortgage for more than you currently owe on your home. From there, you can use the leftover funds to pay off your debt.
What to do if your situation is dire
Debt consolidation loans and the alternatives noted above are best for people who can qualify for a low interest rate. If youâre drowning in debt and canât afford your monthly payments, it might be wise to consider credit counseling, debt settlement or bankruptcy.
While these options arenât ideal, they may be your ticket to getting some relief.
A credit counseling agency can help by acting as a middleman between you and your creditors. A credit counselor can help you understand your credit report and suggest steps for improving your credit score and achieving financial stability. Some credit counseling agencies even offer limited services for free.
If youâre struggling to manage your debt, credit counselors can also set you up with a debt management plan. Credit counseling agencies typically have contracts with creditors with lower interest rates than what you may be currently paying.
Debt settlement goes one step further than debt management. Debt settlement companies like National Debt Relief and Freedom Debt Relief work with you to settle your debt for less than what you owe.
The caveat is that you typically need to pay enough into an account with the debt settlement company before it will begin negotiations with your creditors â often at the expense of making your regular monthly payments, forcing you to default.
If you default on your debts, it could damage your credit score even further, which can take a long time to rebuild.
However, there are also some positives to consider when proceeding with debt settlement, Exantus says. âIf your credit is bad already, then allowing your current debt to stay delinquent is not a negative thing because eventually, it will save you money because youâre paying a lower amount to your creditor than what you originally would have paid if the debt consolidation company didnât intervene.â
Remember, however, that reaching a zero balance on your debt wonât make past late payments or other derogatory notations disappear from your credit report. Youâll still be stuck with the negative account on your credit report for up to seven years from when it went into default (though it should impact your score less and less over time).
Debt settlement services also come with fees, sometimes regardless of whether the company is successful at negotiating down your debt.
If youâre experiencing financial hardship and even debt settlement doesnât sound possible, bankruptcy may be your only option. Depending on the type of bankruptcy you file, you may need to place your assets under control of a bankruptcy court and agree to give up most or all of your wealth.
Note that declaring bankruptcy doesnât discharge all types of debt â for example, you still have to pay student loans and child support debt. Bankruptcy will also remain on your credit report for up to seven to 10 years. Because of this, it could be years before youâll qualify for certain types of credit again.
That being said, filing for bankruptcy can give you a second chance to rebuild your finances. With diligence, your credit can eventually recover as well.
If youâre considering bankruptcy, consult with a bankruptcy attorney to get advice about your best path forward.
Watch out for predatory lenders
If youâre considering a debt consolidation loan, keep in mind that some lenders are predatory in nature. This is especially true of lenders that work with people who have low credit scores. Theyâll often charge exorbitantly high interest rates and a variety of additional fees.
Online companies like OppLoans, for instance, charge triple-digit APRs. That said, itâs nowhere near as pricey as payday loans, which can charge APRs of up to 1251.43 percent.
Accepting a loan with such a steep interest rate can be extremely expensive and may cause you to go deeper into debt. Plus, using a predatory lender defeats the purpose of a debt consolidation loan, which is to make it easier to pay down your debt.
âSometimes itâs hard to spot who are predatory lenders as it relates to the consolidation loans, especially when you have bad credit,â Exantus says. âAnybody who offers you anything may seem like a win. The important thing is to read the fine print. Do not get into any agreement without fully understanding what that is going to cost you.â
Predatory loans are those that benefit the lender at the borrowerâs expense, Sexton adds. The warning signs include:
- The interest for your credit rating seems too good to be true.
- The lender is pressuring you to act quickly.
- The lender is pressuring you to take out a risky or expensive loan.
- The lender is asking you to lie on your application.
- The fees or terms suddenly change at closing.
The bottom line
Regardless of how you get rid of your debt, itâs important to have a plan for accomplishing your goal. It can be discouraging if you canât find a good debt consolidation loan or if youâre faced with the prospect of debt settlement or bankruptcy. But donât let that discouragement stop you from taking action. If you can avoid letting an account go to collections while you decide, do so.
Also, keep in mind that debt consolidation loans are a temporary fix. They donât address the core problem of how you got into debt in the first place. If you opt for a debt consolidation loan, be sure to take additional steps toward financial stability, like creating a budget, curbing your overspending and looking for additional income opportunities. You should also avoid racking up new balances on accounts you just paid off.
Finally, be cautious about jumping on any loan you can qualify for just to pay off your debt quickly. Taking out a predatory loan to pay off your current debt is exchanging one problem for another.