How to get a debt consolidation loan with bad credit

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If you have a lot of different types of debt, getting a debt consolidation loan can be a sound move. But if you have below-average credit — typically below a FICO score of 670 — you may wonder what your loan options are. Fortunately, some lenders specialize in debt consolidation loans for bad credit and weigh factors besides your credit score to qualify you for the loan.

You can improve your odds of approval by spending a few months working to redirect any money you spend on nonessential expenses toward paying down debt and then carefully shopping around for lenders, ideally identifying those that will take your recent efforts into consideration. Here are some additional tips to help you get a debt consolidation with bad credit.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

4 steps to getting a debt consolidation loan for bad credit

If you’re struggling to get out of debt and think a debt consolidation loan can help, keep in mind that to qualify you’ll likely have to have a credit score in the mid-600s, a history of timely payments and sufficient income. However, every lender has its own specific requirements. Start with the following steps to help you find the right loan 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, you’ll have to meet the lender’s 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, it’s 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 very clearly on their websites.

2. Shop around

It’s rarely a good idea to accept the first loan offer you see. Instead, take your time to 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 part of the 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 check rates with just a soft credit check, which won’t 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.

3. Consider a secured loan

Debt consolidation loans are typically unsecured, meaning they don’t require collateral. But if you’re having a hard time getting approved for an affordable unsecured consolidation loan, a secured loan might be worth considering.

Secured loans require some form of collateral, such as a vehicle, home or other type of asset. The collateral usually has to be worth enough to cover the loan amount in the event that you default. Because of this, it’s typically easier to get approved for a secured loan than an unsecured one, and you may even qualify for a better interest rate.

4. Wait and improve your credit

If you’ve tried everything and can’t 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 each and every month for several months in a row. It’s also a good idea to focus on paying down credit card balances and eliminating all nonessential monthly expenses, such as meal subscriptions, wine club memberships and fitness apps.

“Make a short-term plan that ensures you’re consistently allocating money towards debt payments every month,” says Steve Sexton, CEO of Sexton Advisory Group. “Once you’ve 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. You’ll have better luck with a bank or credit union vs. an online lender because you can show that you’ve already started taking the steps to paying down your debt and correcting the issue.”

It’s also a good idea to get a copy of your three credit reports, which you can do for free once a year, and check for errors. If you find any, you can dispute them with the three credit reporting agencies.

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 isn’t in great shape, particularly if you’ve already built a positive relationship with them.

If you’re 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 (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

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.

“Most online lenders will be more flexible in providing these types of loans,” says Ash Exantus, director of financial education at BankMobile.

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, it’s important to know whether the company you’re considering is a direct lender or a third-party lender, says Sexton. “Working 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.”

If you’re considering debt consolidation loans for bad credit, here are some online lenders you may want to check out:

  • LendingClub is reported to have a minimum credit score requirement of 600. APRs range from 10.68 percent to 35.89 percent on debt consolidation loans of up to $40,000.
  • Upstart requires applicants to have a minimum credit score of 600 or higher to qualify for a debt consolidation loan. Qualified borrowers may be able to take out loans from $1,000 to $50,000 with an APR range of 4.66 percent to 35.99 percent.
  • Avant’s minimum FICO score is 580. However, the company says that most customers who receive loans have a score of between 600 and 700. If you qualify for financing, you may be able to borrow as much as $35,000 at an APR between 9.95 percent and 35.99 percent.
  • OneMain Financial doesn’t 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 consolidation loans with OneMain Financial is 18 percent to 35.99 percent, and borrowers may qualify for loans of up to $20,000.

Summary of the best bad-credit debt consolidation loan options

Lender Minimum Credit Score APR Range
LendingClub 600 10.68%–35.89%
Upstart 600 4.66%–35.99%
Avant 580 FICO 9.95%–35.99%
OneMain Financial Not specified 18%–35.99%

How to manage your debt consolidation loan

Once you’ve obtained the funds from a debt consolidation loan, it’s 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 you’ll be capable of doing so.

“Know ahead of time how much you’re going to have to pay each month,” says Exantus. “If the amount that you’re going to pay is not conducive to your current budget, then it would not make sense to proceed with a debt consolidation loan.”

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.

“Some people will receive the money and proceed to use it for other purposes, or will fail to pay off the entirety of their debt,” says James Lambridis, CEO of DebtMD. “This will only put you in a worse off financial situation.”

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. It’s a good way to potentially lower your interest payments if your poor credit resulted in a high rate, and it will also help keep you on track — especially important for your credit, since timely payments on your loan is one of the best ways to raise your credit score.

Resolve any spending issues

Finally, you’ll 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, it’s easy to fall right back into debt, says Sexton.

This includes trying not to reach for those credit cards again once they’ve been paid off, as you don’t 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 can’t qualify for a debt consolidation loan with a lower interest rate than you’re currently paying, you might want to consider some of these alternatives instead.

Do-it-yourself fixes

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 you’re 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 you’re 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 isn’t 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 you’re 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.

Home equity

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 isn’t 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 home’s equity may help you qualify for financing and possibly secure a lower interest rate, there’s significant risk involved as well. If you can’t keep up with the payments, you could risk losing your home to foreclosure. It’s best to pursue this option only if you’re certain that you won’t 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 — 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 alternatives noted above are best for people who can qualify for a lower interest rate. If you’re drowning in debt and can’t afford your monthly payments, it might be wise to consider credit counseling, debt settlement or bankruptcy.

While these options aren’t ideal, they may be your ticket to getting some relief.

Credit counseling

Credit counseling agencies 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 you’re 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

Debt settlement goes one step further than debt management. Debt settlement companies like National Debt Relief and Freedom Debt Relief work with you in order 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 — 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, says Exantus. “If 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 you’re paying a lower amount to your creditor than what you originally would have paid if the debt consolidation company didn’t intervene.”

Remember, however, that reaching a zero balance on your debt won’t make past late payments or other derogatory notations disappear from your credit report. You’ll 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.

Bankruptcy

If you’re experiencing financial hardship and even debt settlement doesn’t 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 doesn’t discharge all types of debt — 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 you’ll 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 you’re considering bankruptcy, consult with a bankruptcy attorney to get advice about your best path forward.

Watch out for predatory lenders

If you’re 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. They’ll often charge exorbitantly high interest rates and a variety of additional fees.

Online companies like LendUp and OppLoans, for instance, charge triple-digit APRs. That said, they’re nowhere near as pricey as payday loans, which can charge APRs of 400 percent or higher.

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.

“Sometimes it’s hard to spot who are predatory lenders as it relates to the consolidation loans especially when you have bad credit,” says Exantus. “Anybody 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.”

Predatory loans are those that benefit the lender at the borrower’s expense, adds Sexton. 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, it’s important to have a plan for accomplishing your goal. It can be discouraging if you can’t find a good debt consolidation loan or if you’re faced with the prospect of debt settlement or bankruptcy. But don’t let that discouragement paralyze you. 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 don’t 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.

Featured image by GaudiLab of Shutterstock.

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