How to Get a Debt Consolidation Loan with Bad Credit

How to Get a Debt Consolidation Loan with Bad Credit

Housten Donham

May 16, 2019

If you have serious debt and are stuck with a bad credit score, you may still be able to get out of debt using a debt consolidation loan. Debt consolidation loans are available for people who have bad credit, but since they may charge additional fees and come with high interest rates, it’s important to weigh your options. Before you decide to fix your debt with a poor-credit consolidation loan, here’s what you should know.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a lump sum of money you borrow, then use to immediately pay off some or all of your existing debts. You pay back the loan over time in monthly payments.

People typically use loans to consolidate their debt because it can come with a lower interest rate than your current debts, allows you to combine multiple debts into a single monthly payment, and could help you to get out of debt faster.

With the right debt consolidation loan, the money you borrow may come with better terms than those associated with your current debt. The best terms, of course, will go to borrowers with good credit, but even if you have poor credit, you could still qualify for a loan that offers terms that are good enough to meet your needs. 

Even if you have poor credit, you could still qualify for a loan that offers terms that are good enough to meet your needs.

Qualifications for a Debt Consolidation Loan with Bad Credit

Qualifying for a poor-credit debt consolidation loan may be difficult, but it’s not impossible. Before you start looking for a bad credit debt consolidation loan, you should know that some lenders will reject your application outright if you don’t meet the minimum credit score requirements. That’s why it’s important for you to know your credit score before applying, so that you don’t end up wasting your time with lenders who may not consider your application.

Most lenders consider a score of 629 and below to be bad credit, 630 to 689 as fair, and good credit as 690 to 719. There are some lenders, however, who will accept credit scores in the 500s or even lower, so shop around. It’s a good idea to compare loan offers from several lenders in order to secure the best deal possible. Don’t simply go with the first lender who’ll work with you.

During the application process, almost every lender will also review your credit report with a hard credit pull before they lend to you. A hard credit pull gives your creditor insight about how you’ve used credit in the past, and it will help them make an informed decision about whether or not they should lend to you. A credit pull of this kind may slightly damage your credit score, so it’s best to avoid lenders with high credit minimum requirements.

Beyond looking at your credit report and credit score, lenders review other aspects of financial health to determine if they will grant a debt consolidation loan to someone who has bad credit. 

  • Proof of income: You will need to provide proof of income so that your lender can be sure you have the financial means to pay off the loan.

  • Financial stability: You’ll need to demonstrate that you are financially stable, with a regular income and good spending habits so that the lender feels confident that you are not a financial risk.

  • Home equity: Some lenders may look for equity, such as the equity in your home that might be put up as collateral on the loan.

  • Debt-to-income ratio: Your debt-to-income rate, or DTI, can’t be too high if you expect to qualify for any loan. Even if you did qualify with a high DTI, chances are that the rate you will be given will so high the loan won’t be worth it.

After reviewing all of the factors above, your lender will determine whether you qualify for a loan. There are many different types of lenders who provide debt consolidation loans for people with bad credit, so you should get to know your lending options.

Where Can You Get a Debt Consolidation Loan with Bad Credit?

There are lenders out there who specialize in providing debt consolidation loans even if you have bad credit.  Here are a few options to keep in mind if you have poor credit and are looking for ways to pay off your debts with a loan:

  • Banks: While it can be difficult to qualify for a bad credit debt consolidation loan through a bank, it may still be an option if you already have an account open with them. Banks have strict lending criteria, and will typically only lend to people with higher credit scores.

  • Local credit unions: A credit union may offer better terms than a bank for individuals with poor credit. If you already have a working relationship with a credit union, your chances of getting a loan with decent terms is even better.

  • Online lenders: Online lenders are usually more likely to approve a poor-credit debt consolidation loan than traditional banks. Online lenders will also often allow you to compare rates and to apply easily from home.

  • Home equity loans: This is not the same as a debt consolidation loan, but it could allow you to consolidate your debts into an affordable monthly payment if you have considerable equity in your home. A home equity loan will, however, put your home at risk if you fail to keep up with the payments.

Even if you qualify for a poor-credit debt consolidation loan, a lower credit score will likely get you hit with less favorable rates and terms, which in some cases may mean that securing the loan won’t be worth your while. If you decide this option is the right choice for you, the process for getting a loan is pretty straightforward.

How to Get a Debt Consolidation Loan with Bad Credit

The first step in seeking out a poor-credit debt consolidation loan is to search for a lender, either online or at banks and credit unions in your area. It’s essential that you shop around, since rates for loans with bad credit can sometimes be very high.

It’s essential that you shop around, since rates for loans with bad credit can sometimes be very high.

Once you’ve found a lender willing to work with you, you’ll begin the application process. Usually, you’ll have to provide them with information concerning your debt, income, and other personal financial information. If you qualify, the lender will review your application and make you an offer. If the rate is favorable to you and you accept the terms of the loan, you may have to pay origination fees, which are the fees associated with the cost of processing your loan. Then, you’ll receive your loan.

You may be able to increase your chances of getting a debt consolidation loan by adding a co-signer with good credit onto your loan application, but this could be risky for your co-signer. If you fail to pay back to loan, they’ll be on the hook and your relationship with them may be damaged because of it.

Pay special attention to fees and terms, in addition to rates, in any contract you’re offered. It will take some time to go through all the fine print, but it may end up saving you a lot of money in the long run.

Risks of Getting a Debt Consolidation Loan with Bad Credit

It’s important to understand the many potential risks associated with poor-credit debt consolidation loans. The following are just some of the bigger risks to keep in mind.

  • High interest rates: You could end up paying a higher interest rate than you currently have, which may possibly defeat the purpose of searching for a loan in the first place if you were intending to snag a lower rate.

  • Higher payments: In most cases, you will end up paying more monthly than you are currently making in minimum payments. If you can barely afford the minimum payments now, a debt consolidation loan may not help you.

  • Penalties: If you end up missing any of your monthly payments on your loan, you could trigger additional interest charges and fees, and end up burying yourself in even more debt.

  • Credit risks: If you fail to pay back the loan, your credit will be further damaged, making it harder for you to secure loans in the future.

Is It a Good Idea to Get a Debt Consolidation Loan with Bad Credit?

Knowing whether or not a debt consolidation loan is right for you depends on your personal financial situation. If you can afford to make the monthly payments, and you’re able to qualify for an interest rate that’s lower than what you’re paying right now, it might be a good idea to seek out a poor-credit debt consolidation loan.

It can still be very difficult to find a debt consolidation loan with a low interest rate if you have bad credit.

Luckily, there are other alternatives out there for people with bad credit who are looking to get out of debt.

  • Credit Counseling: Consumer credit counseling agencies are typically non-profit organizations that provide money management advice and debt help for people who are struggling with their finances. Credit counseling services may help you learn how to budget, educate yourself about debt relief options, and show you how to get out of debt. Best of all, many of their workshops and resources are free. If you have at least $5,000 in unsecured debt that adds up to 15%-49% of your annual income, a credit counseling agency may be able to offer you a Debt Management Plan, or DMP, that will lower your interest rate and structure the repayment of your debt into affordable monthly payments.

  • Bankruptcy: Bankruptcy is usually the option of last resort for people who are unable to pay back their debt. If you are unable to repay your debts and can prove it to a court, you may be able to qualify to file for bankruptcy. A bankruptcy will stay on your credit report for seven to ten years. Depending on the type of bankruptcy you may qualify for, your qualified debts may be entirely discharged or you will enter a court ordered repayment plan and you will be left debt-free after completion. However, you’ll have to hire an attorney and pay the associated fees. Your credit score will be severely damaged with a bankruptcy, but your score may recover after a few years. Filing for bankruptcy may be a good idea for individuals who have no way of paying off their debt, although people who own property may have to liquidate some or all of their assets in order to solve their debt problem with bankruptcy.

  • Debt Settlement: With debt settlement, you or a company you hire will negotiate directly with your debtors to arrive at a new settlement in order to pay off your debt. In most cases, you will end up paying 70%-75% of your original total debt amount after fees. Your credit score will suffer under debt settlement, and you may be contacted by debt collectors during the debt settlement process. Debt settlement works best for individuals with more than $7,500 in unsecured debt, or debt that is not linked to any assets such as property. It’s also useful if you have bad credit, since you may still qualify for a debt relief program even with a low credit score. Many reputable debt agencies, such as Freedom Debt Relief, have years of experience in successfully negotiating debt settlements. We’ve settled over $10 billion in consumer debt—more than any other debt relief company.

There are many ways to pay off your debt when you have poor credit, so make sure to explore all your options before committing to a debt consolidation loan. Take a minute or two to learn more about all your options for getting out of debt.

Struggling with debt is a stressful experience, but you’re not alone. Around 122 million Americans carry credit card debt and 14% of consumers have credit card balances of more than $10,000. The first step toward solving your debt problem is seeking out a solution and educating yourself on your available options.

Your financial situation is unique, and you can only tackle your debt by understanding what’s best for you. If you have questions about getting out of debt, Freedom Debt Relief is here to help, call us at 800-910-0065 or request a free debt evaluation by completing our simple online form. One of our Certified Debt Consultants can help you think through your options and find out what’s best for you.

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