How to Get a Debt Consolidation Loan With Bad Credit

If you're tired of juggling multiple debt payments each month, debt consolidation could make your financial life less stressful. It's possible to get a debt consolidation loan even if your credit isn't perfect. For example, you could still qualify with a score in the 580 to 669 range, which counts as fair credit on the FICO scale. 

You'll need to research lenders to find one that offers debt consolidation loans for bad credit at reasonable interest rates. Take a breath; you've got options. Banks, credit unions, and online lenders may offer consolidation loans for people with credit profiles just like yours. 

Consolidation could still benefit you, even if you don't qualify for the lowest advertised rates. You could streamline your budget and have fewer monthly payments. More importantly, debt consolidation could lift some money stress off your shoulders. 

Now, let's look at how to get a debt consolidation loan with bad credit. 

How Bad Is Your Credit?

Debt consolidation isn't an option for everyone, and your eligibility for bad credit debt consolidation loans will depend on just how bad your credit score is.

According to FICO, good credit scores start at 670. Scores of 580 to 669 are deemed "fair," and 579 and under is "poor."

In this range, FICO says, "Your score is well below the average score of U.S. consumers and demonstrates to lenders that you are a risky borrower." 

What Credit Score Do You Need for a Debt Consolidation Loan?

The credit score you need for a debt consolidation loan varies by lender. It's possible to get approved with a lower score if you have other marks in your favor. Factors that could help offset a lower credit score include a steady income, a stable job history, and a low debt-to-income (DTI) ratio. DTI measures how much of your before-tax pay goes to debt repayment each month. 

Credit unions and community-based lenders may be more flexible for borrowers who have accounts in good standing. Even if your credit score isn't perfect, your bank or credit union might approve your loan application if you've always been a good customer. 

You could also qualify for a secured debt consolidation loan with a lower credit score. You'll need some kind of collateral to offer to the lender. Collateral is something of value that you own, like a car or a bank account. Lenders may view you as less risky and offer a slightly lower rate if you're willing to pledge some of your assets as a guarantee.

As you compare debt consolidation loans for bad credit, keep a close eye on costs. Lower scores may mean a higher interest rate and/or more fees. It's rarely a good idea to take out a debt consolidation loan at a higher interest rate than what you pay now. 

To evaluate loan offers, look at what you'll pay for the loan versus what you'll gain from debt consolidation. If you can measure gains in dollars saved on interest, that's a good sign. If the financial savings is less, but you get peace of mind from knowing your debt is more manageable, that may help offset some of your uncertainty about cost. 

Your credit plays a big part in what you, or anyone else, qualifies for when applying for debt consolidation loans. What matters most is that you get a loan that helps make life a little better for you.

Types of Debt Consolidation Loan With Bad Credit

Suppose you are in the fair credit score range and can qualify for a possible debt consolidation loan. In that case, you have several debt consolidation options. 

Secured personal loans for bad credit

Secured loans are backed by collateral—like a car, boat, or another type of asset. These are typically your best option for consolidating debts because they're low-risk for lenders (meaning lower interest rates). In addition, they're less dependent on your income, credit, or general ability to repay.

Unsecured loans with a co-signer

Unsecured personal loans are another option, and your best bet is to get one with a trusted co-signer if at all possible. An unsecured debt consolidation loan with bad credit can be hazardous for lenders. So without a higher-credit co-signer on the application, you might not qualify.

Home equity loans and HELOCs with bad credit

If you own a home and have a lot of equity, a home equity loan or HELOC (home equity line of credit) could be an option. These have much lower rates than personal loans. Since your home is the collateral, some lenders will accept your application even if you have a lower credit score. 

The right debt consolidation loan for bad credit depends on how low your credit score is, your access to a co-signer, and your overall financial picture. 

A debt consolidation loan is different from debt settlement. Debt settlement helps you pay off debts for less than what you owe. Check out our comprehensive debt settlement guide to learn more about the process.

Where to Get a Debt Consolidation Loan With Bad Credit

Several types of lenders offer debt consolidation loans to people with bad credit. You might find loans locally, at credit unions or regional banks, or online. Your credit scores, debt, and income will influence which lender proves to be the right option. 

Credit unions

Credit unions are member-owned organizations that don't operate for profit, like banks do. A credit union may be a good place to look for a bad credit debt consolidation loan if you're already an active member. 

Why? Credit unions operate for the benefit of the people who join them. Approval criteria for loans may be more flexible if you have bad credit, as long as your account history with the credit union is positive. As an added benefit, you may pay lower rates and fees for a consolidation loan from a credit union. None of this is guaranteed, but if you're a credit union member, it's worth looking into. 

If you’re not a member, look into joining one, since you can absolutely join a credit union with bad credit as long as you meet membership criteria. 

Online lenders

Reputable online lenders may offer opportunities for borrowers with fair or poor credit to qualify for consolidation loans. Approval may be granted through an automated system that includes your income and debt levels, as well as your credit scores, for review. 

An online lender can offer other advantages, like fast funding and 24/7 account access. The downside is that you can't talk to someone in person about your loan. If you have questions, you may be able to get them answered over the phone or in an online chat. 

Community banks

Community banks are similar to credit unions in that they're community- and people-focused. If you belong to a community bank, you might be able to qualify for a consolidation loan with bad credit based on your previous account history. 

The loan application, approval, and funding process may be a bit slower when you borrow from a smaller bank. However, you get the benefit of working with a loan officer one on one to figure out which loan is suited to your needs and credit profile. 

Peer-to-peer (P2P) lending platforms

Peer-to-peer lending platforms let people with bad credit get debt consolidation loans from a pool of investors. You submit a loan request, and investors who use the platform can choose to fund part of it. Once the loan is fully funded, you get the money to consolidate debt and you pay back the investors over time, with interest. 

Approval rates and minimum credit score requirements can vary widely from one platform to the next. Interest rates are usually based on a proprietary credit grading scale. For example, someone with an AA rating would likely get a much lower rate than someone with a D rating. 

No matter where you look for a debt consolidation loan for bad credit, read the fine print. Compare interest rates, loan terms, and total repayment costs before you commit. That way, you don't rush into a consolidation loan that doesn't offer you any real benefit. 

To learn more about your debt relief options, read through our Freedom Debt Relief FAQs.

Debt Consolidation Loan Rates for Bad Credit

Bad debt consolidation loans aren't always the best choice, even if you can qualify with a lower credit score. Consumers with bad credit pay much higher interest rates on these loans in many cases. 

If you're considering a debt consolidation loan with bad credit, make sure you weigh the costs (both long-term and monthly) before signing on the dotted line. These loans are helpful if you can get a better rate (compared to the interest you're paying across all your debts now), reduce your monthly payment, or both.

Pros and Cons of Debt Consolidation With Bad Credit

Debt consolidation could make your debts easier to manage. It may work better for some people than others. A review of the pros and cons could help you decide how well it fits into your debt payoff strategy.

Pros

• Fewer monthly payments streamline your budget and make it less likely that you'll miss a due date. 

• You may save money on interest in the long term if your consolidation loan rate is lower than the combined average rate you pay on your debts now.

• You might get a monthly payment that's lower than what you pay now.

• Consolidation loans typically have fixed rates that don't change. That makes repayment predictable, and you can easily calculate how much the loan will cost. 

• If you make loan payments on time consistently, your credit score could improve over time. 

Cons

• Lenders may charge origination or late fees, which add to the cost of your loan.

• You risk the loss of your collateral if you fail to repay the loan. For example, if you use a home equity line of credit to consolidate debt, you could lose your home if you can't pay. 

• Debt consolidation loans aren't a magic bullet, and they can't fix money problems.

How to Apply for a Debt Consolidation With Bad Credit

If you're thinking about applying for a debt consolidation loan with bad credit, pull your credit report first and check it for errors. If anything looks amiss, report it to the credit bureau and get it fixed ASAP. This can help improve your score and your chances of qualifying. Suppose you're applying for a home equity loan. In that case, your mortgage lender may be able to help you correct errors in a day or two by using a service called Rapid Rescore. 

Organize your paperwork

When you apply, lenders might ask for certain documents that show proof of income or assets. For example, you might need your last two months' worth of paystubs, copies of your W-2s, last year's tax return, or bank account statements. Getting your paperwork together beforehand can save time in the application process since the lender won’t have to chase you down to request documents. 

Get prequalified before applying

You can typically get prequalified for a loan before actually applying for one. This allows you to gauge your eligibility,  the potential costs, and the amount of the loan without a hard credit inquiry. (These inquiries lower your score and can make the process even more challenging.)

Check your credit score

Most lenders require an estimate of your score when prequalifying you, and without one, their quote may be inaccurate. If you're unsure of your score, it's time to check it. Here are a few ways to get your FICO Score for free:

• Check your credit card perks. Some credit card companies offer free monthly credit scores as a cardmember benefit. Log in to your credit accounts to find out if you have access to this feature. 

• Check your bank. Banks may offer free FICO Scores if you have an open loan or credit card account. You can check for credit score access in your mobile banking app, or call customer service for clarification.

• Get free scores from Experian. Experian offers free FICO Score access monthly. You don't need a credit card to subscribe for credit score updates. 

• Go to myFICO.com. FICO offers a free monthly subscription that includes your Equifax credit score and credit report. 

Remember, it won't hurt you to check your credit yourself. You'll only notice an impact on your scores if you apply for a loan or credit card. 

Improve your credit score if possible

Your credit score is never set in stone, so consider improving it before you apply for debt consolidation if yours is very low. Notify credit bureaus of any errors on your report. Suppose your problem is a collection account, a serious delinquency. In that case, you might be able to negotiate a "pay for delete" and get the item removed. 

And if you have family or friends with excellent credit, ask them to make you an authorized user on one or more accounts. You don't access their credit, but their good repayment history will appear on your report and could improve your scores.

Calculate your DTI

Lenders look at how much of your pay goes to debt repayment, and you should too. If you know your DTI now, you can estimate how much you could reasonably afford to pay for a consolidation loan each month. You can also gauge how your future payment amount might compare to what you pay now, if you've gotten prequalified. 

To find your DTI, add up your total monthly debt payments and gross monthly income. Then, divide your debt payments by your income. For example, if you pay $1,000 to debt each month and your gross pay is $5,000, your DTI is 20%.

1,000 / 5,000 = 0.20

Line up a co-signer

A co-signer could make it easier to qualify and reduce the interest rate and costs you'll pay for a potential debt consolidation loan. Make sure you choose one who has a solid income and a good credit score, as these will heavily influence your loan application. And make sure you can successfully pay your loan on time every month, because late or missing payments could drag your co-signer's credit down with yours. 

Estimate your home equity

If you're a homeowner, find out if you have enough home equity to qualify for financing. You can do this by subtracting your current mortgage balance from your home's market value. If you're unsure of its market value, use a home value estimator on a site like Zillow, Redfin, or Trulia to get a good idea.

Note that with bad credit, you'll probably need more equity than a borrower with good credit. So if a lender allows prime applicants to borrow against 85% of their property value, it might only go to 75% for those with poor credit.

Choose a lender

Don't let the fact that you have bad credit make you shy about shopping for the best deal available to you. Prequalify with at least three lenders. Once you have estimates from each, compare the quotes line by line, and don't be afraid to ask questions if there's a number or fee you don't understand. Interest rates, terms, and fees can vary widely from one lender to the next, so shopping around can ensure you get the most affordable loan possible.

Apply for a loan

Once you've done all these preliminary steps and zeroed in on the best lender, it's time to fill out the complete application. You'll need to agree to a credit check, and in many cases, you must prove your income, bank account balances, and assets. Your lender can give you a complete list of what you'll need once you get started.

7 Ways to Improve Your Chances to Qualify for a Bad Credit Consolidation Loan

It’s possible to qualify for a debt consolidation loan even if you have a low credit score. You can take several steps to increase your chances to qualify for a loan, like providing proof of steady income and applying with a co-signer. 

1. Understand your credit history

Knowing what factors may have an effect on your credit score will help you to understand where you can make improvements. To do that, you can get a copy of your credit report from the three major credit bureaus—Experian, TransUnion, and Equifax—by visiting AnnualCreditReport.com. You’re entitled to free online access to your credit report each week. 

2. Improve your credit score

Although improving your credit score may be a fast fix, having a higher score could increase your chances of securing a debt consolidation loan, and at more competitive rates. One way to help change your score quickly is by fixing any errors on your credit report.

Once you understand your credit history, you can take a look at what you can do. The most common ways you can improve your score as a borrower are:

• Pay bills on time

• Lower credit card balances

• Avoid applying for new credit cards and loans unless absolutely necessary

3. Reduce existing debt

Lenders look at your debt-to-income ratio (DTI) as one of the factors when deciding whether to approve you for a loan. A high DTI could mean lenders are more wary to lend you money.

To help lower your DTI, consider paying down some of your current debt. Even making extra payments, no matter how small an amount, can make a difference.

4. Prove consistent income

Lenders want to be confident in your ability to repay your loan, and that means showing you have enough income to do so. You’ll most likely need to provide documentation showing you have steady income as well. For proof of income, you can use pay stubs, tax returns, and documents showing your income if you’re a contract worker or self-employed. 

5. Offer collateral

Collateral is money or an asset (like a car) you offer to the lender in the event you can’t pay back your loan. Putting up collateral is for secured loans and can help reassure lenders. Think of it as a sort of safety net for the lender.

Before signing up for a secured loan, consider the risks and make sure you understand your responsibilities. If you’re unable to repay the loan, you could lose your collateral.

6. Apply with a co-signer

A co-signer is another person on your loan application. Ideally, this person will have a high credit score and positive credit history. This strategy could help you improve your odds of getting a debt consolidation loan.

Since this person is responsible for paying your loan if you can’t, choose someone you trust. Speak with the co-signer to ensure they fully understand the responsibilities they're taking on.

7. Shop around lenders

Looking at your options ensures that you’re working with lenders who are more likely to approve your loan when you need credit card debt relief. Also, it could help you find the best rates and terms for your financial profile. 

You can compare your loan options by prequalifying with several lenders. Doing this won’t impact your credit score.

What to Do if You're Turned Down for Debt Consolidation

Suppose your credit score is too low for a debt consolidation loan, the costs are too high, or you can't qualify due to other factors. In that case, there are alternatives to help you manage your looming debts.

Credit counseling could be your first line of defense. Many credit counselors offer debt management plans (DMPs), which allow you to make a single payment to cover your various debt payments. This prevents late payments and streamlines the payment process. 

You may also be eligible for a debt relief plan in some cases. Debt relief, or debt settlement, means negotiating with your creditors and convincing them to accept less than what you owe as payment in full. You can contact creditors yourself or have a debt relief company negotiate on your behalf.

Debt settlement isn’t a loan. It's a legal way to reduce what you pay to your creditors. Settlement can be a realistic option if you're behind on payments already because of a financial hardship, or can't qualify for a consolidation loan because of your credit. You make one affordable monthly payment each month, and you could potentially get out of debt much faster than by making minimum payments.

A Freedom Debt Relief debt expert can walk you through whether debt settlement might be right for you. You might be a good candidate if you mostly owe unsecured debts and you want an expert negotiator on your side. Learn how Freedom Debt Relief works.

Check out Freedom Debt Relief reviews on YouTube

Need More Guidance?

If you're feeling trapped by your debts, there are ways out—even if your credit score isn't perfect. To determine which path is best for your situation, reach out to an experienced credit counselor or debt management company. They can help you get on track to a debt-free lifestyle.