Debt consolidation loans for bad credit
Key takeaways
- A debt consolidation loan is primarily meant to save money on interest — usually by securing a lower APR and a shorter payoff timeline.
- Bad credit debt consolidation loans may not be as effective due to the higher interest rates, but one can still simplify your monthly payments.
- Improve your chances of getting a good deal by checking your credit report for errors, raising your credit scores, shopping around and looking into secured options.
Debt consolidation is one of the best ways to simplify your debt repayment and, if you can qualify, secure a competitive interest rate. However, a bad credit score can make it more difficult to qualify, and you’ll face interest rates up to 36% if you are approved.
When you apply for debt consolidation, make sure you’re paying less interest overall. A debt consolidation loan is only worthwhile if you’re saving money. Lower monthly payments may be appealing, but avoid a debt consolidation loan if you’re unable to reduce the total amount of interest you pay.
These lenders will work with bad credit, but depending on your budget and finances, it may make more sense to build your credit score first. Compare your options against alternatives — and staying the course on your current debt — before you make a final decision.
Risks of consolidating debt with bad credit
While debt consolidation can be a convenient way to combine monthly payments and lower the total amount you pay, they come with significant risk if you have bad credit.
- Qualifying for a debt consolidation loan with bad credit can be challenging. Borrows with low credit scores may be viewed as risky, which can limit your terms and options. This means higher interest rates and a loan that costs more than just sticking with your current debt payments.
- May not find a lower interest rate. Borrowers with low credit scores may only qualify for consolidation loans with the same or higher interest rates. If you’re not able to qualify for a rate that saves you money, you’ll be spending more for the convenience of one monthly payment.
- Fees may force you to borrow more than you owe. Orientation fees and other charges are typically rolled into the loan, which can increase the balance borrowed or deducted from the proceeds. And with bad credit, lenders may charge you the maximum fee allowed — sometimes up to 12% of the total loan funds.
How to get a debt consolidation loan with bad credit
Lenders base loan decisions largely on the condition of your credit. Generally, the lower your credit scores, the higher the interest rates lenders will offer you on financing. FICO defines bad credit as a score that’s 579 or lower, though some lenders may consider credit in the “fair” range to be high risk as well.
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. Many banks offer free tools that allow you to check and monitor your credit score.
Once you know your credit score, it’s easier to identify lenders that may be willing to work with you. There are lenders specializing in bad credit loans, and many list credit score requirements on their websites, which can help narrow down your choices.
A higher credit score can improve your chances of getting approved for a debt consolidation loan—and help you qualify for better rates and terms. It may be worth waiting to apply until you’ve built up your credit score.
2. Review your finances
You may not be eligible for a loan if your credit scores are too low, but loan approval hinges on other factors, too. Perform a financial health check-up to understand your debt-to-income (DTI) ratio. You can nudge your DTI in the right direction by creating or revisiting your budget. Trimming your current expenses, paying off other debt and taking on side hustles are all helpful strategies.
Do your research and compare loan amounts, repayment terms and fees from multiple sources. Prequalify with at least three lenders to view your potential rates without a hard credit check. This process can take time, but it might save you hundreds, if not thousands, of dollars.
3. Prequalify with multiple lenders
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 when choosing the right debt consolidation lender.
- Credit unions and local banks
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Talk to a loan officer about whether you qualify for a personal loan — and what the rate and terms are if you do. The institution may look beyond your low credit score and consider your entire financial history, personal circumstances and relationship you have with them to approve you for the loan.
- Online lenders
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They often offer bad-credit loans and generally have more flexible eligibility criteria than a traditional bank. However, online lenders typically charge high APRs and origination fees for bad-credit debt consolidation loans.
Predatory loans benefit the lender at your expense and are common for bad-credit borrowers. Watch for sky-high rates, pressure to act fast, or changing terms. From debt consolidation to auto loans, loans from predatory lenders can be costly and may push you deeper into debt instead of helping you get out.
4. Consider a cosigner, joint loan or a secured loan
To increase your loan approval odds and chances of landing a lower rate, use a cosigner or co-applicant or shop around for a secured personal loan.
- Cosigned loans. Cosigners share legal responsibility for the loan, but not ownership. Signing the loan documents with a creditworthy family member or friend can both increase your approval odds and lower your interest rate.
- Joint loans. Joint applicants (also called co-borrowers or co-applicants) take on the debt with the primary borrower and have joint ownership of the balance.
- Secured loans. These loans require some form of collateral, such as a vehicle, home or another asset. If you default, the lender will seize the collateral to recoup its funds. Because of this, getting approved for a secured loan is typically easier than an unsecured one, and you may even qualify for a better interest rate.
Debt consolidation loans for bad credit
| Lender | APR | Loan amount | Min. credit score |
|---|---|---|---|
| Avant | 9.95%-35.99% | $2,000–$35,000 | 550 |
| Best Egg | 6.99%-35.99% | $2,000–$50,000 | 600 |
| Upstart | 6.20%-35.99% | $1,000–$75,000 | No Requirement |
| Upgrade | 7.74%-35.99% | $1,000–$50,000 | 600 |
| Happen Bank | 6.53%-35.99% | $1,000–$75,000 | 600 |
Avant
About the lender
Avant is best if you need to consolidate a small to midsize debt load. The maximum amount you can borrow is $35,000 — the lowest on our list of debt consolidation loans for bad credit. If approved, you could receive funds as fast as the next day. Plus, Avant allows you to manage your loan via its mobile app.
Pros
- No prepayment fee.
- Mobile app.
Cons
- High maximum rates.
- Administration fee up to 9.99%.
- Lower maximum loan amount.
Best Egg
About the lender
Best Egg can send funds directly to your creditors, which streamlines the debt consolidation process. Once approved, you can receive funds as early as the next business day.
Pros
- Direct payment to creditors.
- Option to prequalify.
- No prepayment penalty.
Cons
- Origination fee up to 9.99%.
- High maximum rates.
- No autopay discounts.
Upstart
About the lender
Upstart might be a good choice if you have a thin credit profile — you don’t necessarily need a credit score to qualify. The lender uses an untraditional approval model, looking at factors outside of your credit, like your education and employment.
Pros
- Considers nontraditional factors.
- Fast funding.
Cons
- Origination fee up to 12%.
- No joint or cosigner option.
- Limited repayment terms.
Upgrade
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Upgrade is an online lender that offers debt consolidation loans with flexible eligibility requirements, a range of loan amounts and repayment terms, plus a co-borrowing option.
Pros
- Fast funding, usually within a day or two.
- Joint application available.
- Option to pay creditors directly.
Cons
- Not available in every state.
- Origination fees applied to most loans.
- Fixed payment due date.
Happen Bank
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Happen Bank is a digital lender and banking platform offering debit consolidation loans up to $60,000. This lender lets you combine multiple high-interest debts into one fixed monthly payment, which may allow you to pay off your debt faster.
Pros
- High loan amount.
- No prepayment penalty.
- Flexible due date.
Cons
- Not all options available in all states.
- Higher-than-average interest rates.
Alternatives to consolidating debt with bad credit
If you cannot get a debt consolidation loan, you have other options. If you haven’t already, start by trying to adjust your budget and spending habits to pay off your debt.
If budget adjustments and alternatives for getting extra cash don’t work, it may be time to consider debt settlement or filing for bankruptcy. You can contact lenders to see if they are willing to negotiate your debt at all. They may be willing to offer you a discount if you pay it all off now or offer you a payment plan. Filing for bankruptcy means going to federal court to get debts discharged, but it should only be used if you have exhausted all other options.
Balance transfer credit cards
A balance transfer credit card lets you move high-interest debt to a new card with a lower rate, often a 0 percent intro APR for a limited time. This can help you pay down your balance faster, since more of your payment goes toward the principal instead of interest.
Most cards charge a balance transfer fee, and the promotional rate only lasts for a set period. If you still have a balance after that, a higher interest rate will apply, so it is important to have a plan to pay it off before the intro period ends.
Nonprofit credit counseling
Nonprofit credit counseling is a service that pairs you with a professional who reviews your finances and helps you create a plan to manage debt. They can help you build a budget, understand your credit, and may recommend a debt management plan to simplify payments and potentially lower interest rates.
Sessions are typically personalized based on your income, expenses, and goals, and many nonprofit agencies offer low-cost or free support. The goal of credit counseling is not just to tackle current debt, but to help you build better money habits and avoid future financial stress. Be sure you’re working with a legitimate, nonprofit credit counselor — not a predatory debt relief company.
401(k) loans
A 401(k) loan lets you tap into your retirement savings and pay yourself back over time, usually within five years. There’s no credit check, and as long as you stick to the repayment schedule, you won’t owe taxes or penalties.
Still, it’s not risk-free. The money you take out stops earning investment returns, and if you leave your job or fall behind on payments, the remaining balance could be taxed and penalized.
Individuals who take a 401(k) loan need to understand that if they do not repay the loan under the plan’s terms, or if they leave their employer for any reason while the loan is outstanding, it will become a taxable distribution with penalties assessed. Read and understand your specific plan rules thoroughly. Not all plan rules are the same, and your plan administrator will oversee all loan terms.— Stephen Kates, CFP, former principal insights analyst at Bankrate
Debt settlement plans
With a debt settlement plan, you negotiate with a creditor to pay less than what you owe, often in a lump sum, and have the rest forgiven. These plans are typically used for unsecured debt, when keeping up with payments is not a realistic possibility. While they can reduce what you owe, they often come with significant trade-offs. They can damage your credit, involve fees, increase your tax liability, and there’s no guarantee your creditors will agree. That’s why you should think of debt settlement as a last-resort option.
Bottom line
Getting a consolidation loan with a less-than-stellar credit score may be more difficult, but it’s not impossible. Certain lenders cater to borrowers with low credit scores, or you can apply for a traditional personal loan with a cosigner or applicant.
Be aware of the total cost of debt consolidation. With bad credit, a personal loan can cost you more than you’re already spending if you aren’t careful. Compare lenders, improve your credit score and seek alternatives if you aren’t able to secure a lower average interest rate.
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