How to Get a Debt Consolidation Loan With Bad Credit

debt consolidation loan
BY Rebecca Lake
Mar 31, 2022
Key Takeaways:
  • Shop for the best debt consolidation loan rate you can get even if you have bad credit.
  • Put your best foot forward when you apply for bad credit debt consolidation loans.
  • Consider debt relief if bad credit debt consolidation doesn’t work for you.

Having too much debt and bad credit scores can be discouraging. High balances can impact 30% of your credit score, so owing too much can hurt you even if you never miss a payment. And if you owe so much that you are missing payments, your credit scores will suffer even more. Consolidating debt to afford your bills and clear your balances can help improve bad credit quickly. How to get a debt consolidation loan with bad credit? It’s challenging, but possible.

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." 

That's why consumers with scores under 580 are unlikely to get approved for debt consolidation. You'll find more options available to you if you can improve your score (at least into the "fair" range) to increase your chances. Borrowing with a secured loan or a co-signer may open up more opportunities.

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 and depend more on the value of your home than your credit rating.

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. 

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.

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. 

Get prequalified before applying

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

Get your credit score before applying

Most lenders require an estimate of your score when prequalifying you, and without one, their quote may be inaccurate. When pulling your credit report, you can get your score (there may be a small fee). Or you can sign up with Experian, or your bank or credit card issuer may allow you to check it for free. Avoid services that require a credit card to get a free score.

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 Alert credit bureaus of any errors on your report. Suppose your problem is a collection account (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 can improve your scores.

Line up a co-signer

A co-signer can 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 can drag your co-signer's credit down with yours. 

Estimate your home equity

If you're a homeowner, see 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 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.

Shop around

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.

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.

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 can be your first line of defense. This can give you personalized guidance for your exact financial struggles. 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 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.

>>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.

Frequently Asked Questions

Where is the best place to get a debt consolidation loan with bad credit?

The answer depends on your credit score and your financial position. Providers like LendingPoint make personal loans with bad credit. However, the interest rate can be as high as 35.99%. Consolidating only makes sense if you can get better terms with a new loan than you currently have. BestEgg and Upgrade offer unsecured and secured personal loans with bad credit. You might qualify for a better interest rate if you can secure the loan with collateral like a vehicle or other valuables. 

Of course, home equity loans offer the lowest rates at any credit level. If you have enough home equity and can qualify for financing, a home equity loan or HELOC offers a lower interest rate.

How does a bad credit debt consolidation loan affect my credit?

A bad credit debt consolidation loan may hurt your credit score at first because the lender will pull your credit report and generate an inquiry in your credit history. That can cause your score to drop temporarily by about 5 points. 

However, consolidating credit card debt can increase your score quickly. That’s because 30% of your credit score depends on credit utilization. Credit utilization is the amount of available credit that you are actually using. So if you have $10,000 in credit lines and the total of your balances is $5,000, your credit utilization is 50%. Many people seeking debt consolidation are maxed out and their utilization is at 100%.

By consolidating your credit card debt with an installment loan or home equity loan, you zero out those balances and your utilization drops to zero. That can raise your credit score quickly. You might even qualify for a better debt consolidation loan in a few months. The trick is to make all debt payments on time and to avoid putting new balances on your credit cards.

What credit score do I need for a debt consolidation loan with bad credit?

LendingPoint allows credit scores as low as 580. BestEgg accepts credit scores as low as 600 and Upgrade goes as low as 560. You may get better rates with their secured personal loan products than their unsecured loans.

How to qualify for a debt consolidation loan with bad credit?

Many lenders allow prequalifying for debt consolidation loans with bad credit. Just complete their online application. It’s helpful if you have an estimate of your credit score. Requesting a copy of your credit report and paying for your scores on www.annualcreditreport.com should be your first step to qualify for a bad credit debt consolidation loan. 

You can offset a low credit score with good income and a low debt-to-income ratio (DTI). DTI equals your total debt payments (rent or mortgage, credit cards, auto loans, student loans, etc.) divided by your gross (before tax) income. Don’t count living expenses like food and utilities in your DTI. If your gross income is $4,000 per month, and your payments total $2,000 per month, your DTI is .5, or 50%. Most lenders prefer a DTI of 43% or less, but some will go as high as 50%.

Consolidating high-interest debt may worsen your DTI because debt consolidation loans can have higher payments even if your interest rate is lower. It depends on the length of your loan term. If you’ve been making minimum payments on your credit cards, you’re set up to be in debt for decades. If you transfer that debt to a five-year personal loan, the payment is likely to be higher even if the interest rate is lower. However, a fixed term does give you a solid end date for your debt, which credit cards don’t provide.