If you have a lot of debt and a FICO credit score that’s 669 or lower (in the range of fair to poor), getting a debt consolidation loan can be a sound move. Some lenders specialize in loans for borrowers with bad credit and weigh factors besides your credit score — such as your income, work history and education — to qualify you for the loan.
A debt consolidation loan should have a lower interest rate than the rate on your current debts and allow you to retire those debts more quickly and at a lower cost. Use Bankrate’s debt consolidation calculator to decide whether this loan is a good strategy for you. Then, shop around for the best rates and terms. You can find debt consolidation loans at online lenders and credit unions.
What are debt consolidation loans?
Consolidating debt with a single loan can be a smart way to save on interest and potentially pay down what you owe faster. With a debt consolidation loan, you borrow money to pay off your existing debts, then make just one monthly payment going forward. Ideally, the money you borrow comes with more favorable terms than your existing debt, such as a lower interest rate.
For example, let’s say you have two credit cards with balances of $5,000 and $2,500 that carry the same annual percentage rate (APR) of 25 percent. By taking out a consolidation loan of $7,500 with a 20 percent APR, you can pay off both credit cards, simplify your repayment plan and pay less interest.
Debt consolidation loans with the best terms, however, are reserved for borrowers with excellent credit. But there are lenders who specialize in working with people who have bad credit, so you may still have a chance to get approved.
Credit score requirements for debt consolidation loans
There are a variety of loan options for borrowers with a wide range of credit scores. In order to qualify for debt consolidation loans with the lowest interest rates, though, you’ll need a good credit score.
These loans may require a credit score of 700 or above, with interest rates ranging from 5.99 percent to 35.99 percent. Only the most creditworthy borrowers will qualify for rates on the lower end of this range. Many of the same lenders will approve borrowers with fair credit in the 640 to 699 range but will likely charge an interest rate that’s on the higher end.
Most lenders require a minimum credit score of 630 or 640 to qualify for a debt consolidation loan. If your credit score drops below this level and you still qualify for a loan, expect to pay sky-high interest rates and hefty origination fees. That being said, you may still have a few options if you’re looking to ease the burden of your current debt load.
The best options for a debt consolidation loan for bad credit
With so many lenders out there, it can be tough to know where to start looking. Here are some good places to start.
Your local credit union
Because credit unions are not-for-profit organizations owned by their members, they typically offer loans with better terms than you can get from a traditional bank. They may also have more leeway to lend to members whose credit isn’t in great shape, particularly if you’ve already built a positive relationship with them.
If you’re a member of a credit union, talk to a loan officer about qualifying for a personal loan. Credit unions may look beyond your low credit score and take into account your entire financial history, personal circumstances and your relationship with the institution.
With an online lender, you can often:
- Compare rates without impacting your credit score
- Apply quickly and easily, without lots of paperwork or visiting a branch in person
- Get funds within a week, or even in as little as one business day
Online lenders may be more likely to approve you for a bad credit loan than a traditional, brick-and-mortar bank.
Check online lender rates on our Personal Loan Rates page.
Your 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. It’s not technically a debt consolidation loan for bad credit, but it can help you score a low interest rate because the loan is secured by your home.
But there’s one drawback: if you default on a home equity loan, the lender can foreclose on your home to recoup the loan amount. So it’s best to pursue this option only if you’re certain you won’t have problems repaying the debt.
Watch out for predatory lenders
Some debt consolidation lenders are predatory in nature, and this is especially true of lenders that work with people who have low credit scores. They’ll often charge exorbitantly high interest rates.
Avoid these types of lenders at all costs. Accepting a loan with such a steep interest rate can be extremely expensive and cause you to go deeper into debt. Plus, it defeats the purpose of a debt consolidation loan, which is meant to make it easier for you to pay down your debt.
4 steps to getting a debt consolidation loan for bad credit
If you’re struggling to get out of debt and think a consolidation loan can help, here are some tips to help you find the right loan and improve your chances of approval.
1. Check and monitor your credit score
Lenders base their loan decisions largely upon the condition of your credit. Generally, the lower your credit score, the higher the interest rate on your loan. If your score is below the lender’s minimum requirement, the lender may decline your application outright.
Most lenders categorize bad credit as a score of 629 and below, fair credit as 630 to 689, and good credit as 690 to 719. However, some lenders may accept credit scores in the high 500s or lower.
Once you know your credit score, you’ll have a better idea of whether you should apply for a debt consolidation loan for bad credit or a personal loan from a traditional lender.
2. Shop around
It’s rarely a good idea to accept the first loan offer you see. Instead, take your time and compare loan options from several lenders. This can be easy with online lenders because you can often check rates with just a soft credit check, which doesn’t hurt your credit score.
In addition to comparing rates, also look at fees, repayment terms and other fine-print items that could affect the cost of your loan. This part of the process can take time, but it might save you hundreds, if not thousands, of dollars if you do it right.
3. Consider a secured loan
Debt consolidation loans are typically unsecured, meaning they don’t require collateral like a car loan or a mortgage. Yet 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 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 wait until you can establish a better credit score.
Finally, get a copy of your credit reports and check for errors. If you find any, you can dispute them with the three credit reporting agencies.
Building your credit can take time. Still, as long as you’re actively working to pay down your debt, it can save you money in the long run.
Benefits of a debt consolidation loan
Debt consolidation loans should be taken on cautiously. Yet choosing the right one can come with a range of benefits. As long as you pay off your new loan in a timely manner, you could end up reducing your stress, saving money and improving your credit.
One monthly payment
The most obvious benefit of debt consolidation loans is that they simplify your monthly payments by consolidating all of your accounts under one balance. When you only have one monthly payment to remember, you’re less likely to miss a due date. This is a valuable benefit, because even one late payment can rack up fees and hinder your ability to pay down your debt.
Lower your interest rate
The other main objective in consolidating your debt is to secure a lower interest rate. Decreasing your interest rate, even slightly, is one of the best ways to save money and pay off debt more quickly. Keep in mind that debt consolidation loans for bad credit won’t always come with a lower interest rate than your existing debt.
Increase your credit score
Debt consolidation loans also have the potential to improve your credit score. The inquiry on your credit report associated with the loan application might cause a small, temporary decrease in your score. However, paying off high credit card balances with a new installment loan could decrease your credit utilization, which can impact up to 30 percent of your credit score. (Credit utilization is the ratio of your outstanding credit card balances to your total credit limits.) You’ll need to leave your credit cards open after paying them off but keep the balances low in order to see a potential bump in your scores.
Stop collections calls
If your debt is in collections, you’re probably tired of receiving constant calls from debt collectors. Once you pay off your debt with a debt consolidation loan, those calls should stop.
Alternatives to a debt consolidation loan
Debt consolidation isn’t 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 these alternatives instead.
- Overhaul your budget. Compare how much you’re spending with how much you earn (aka income) 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 payments 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 also help you to “consolidate” your debt. While in the program, you make one 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 36 to 60 months to complete and may charge program management fees for the service.
Use the equity in your home
If you’re a homeowner with sufficient equity in your home, you may be able to leverage that equity to your advantage even with bad credit. Just keep in mind that while using your home’s equity to secure financing may help you to qualify 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.
- Home equity loan: Sometimes called a second mortgage, a home equity loan is a lump-sum, fixed-rate loan that homeowners can take out against the equity in their homes.
- Home equity line of credit (HELOC): A HELOC is another type of loan that is secured by the value of your home. Rather than borrowing a lump sum at a fixed interest rate, you’ll be taking out a line of credit — similar to opening a credit card. This gives you access to funds whenever you need them, up to a maximum borrowing limit.
- 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 the following options: credit counseling, debt settlement or bankruptcy.
While these options aren’t ideal, they may be your ticket to getting relief.
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, which typically lasts three to five years. They may charge a monthly fee for this service (often $25 to $50).
During this time, you pay one lump sum to the agency each month, plus a small fee. Your credit counselor will then divvy up the payments amongst your creditors. The best part is that credit counseling agencies typically have contracts with creditors with lower interest rates than what you may be currently paying.
That said, going through this process typically results in a notation on your credit report that you’re on a debt management plan. When you apply for credit in the future, a lender may see that and decide not to lend you money because of it.
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 they start negotiations with your creditors — often at the expense of making your regular monthly payments, forcing you to default. If this happens, it could severely damage your credit score, after which it can take a long time to rebuild. This service also costs money, whether or not they’re able to negotiate down your debt.
Finally, settling debt may not help your credit score if the account was delinquent before you settled it. A zero balance won’t make 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).
If the only other option you have is bankruptcy, it might be worth considering debt settlement. Otherwise, an alternative option will likely be best.
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 liquidate some of your assets to pay off some or all of your debts or get on a payment plan.
It’s important to 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. It could be years before you’ll qualify for certain types credit again.
That being said, filing for bankruptcy gives 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.
Make paying off your debt a priority
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 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.
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 habit and looking for additional income opportunities. You should also avoid racking up new balances on accounts you just paid off at all costs.
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.
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