Taking out debt consolidation loans can streamline your monthly debt obligations and help you get out of debt faster. However, this debt reduction strategy isn’t right for everyone. You may have difficulty qualifying for a debt consolidation loan at an attractive interest rate if you have bad credit.
It’s worth considering your options if you have bad credit and high-interest debts. In particular, payday loans or title loans with sky-high interest rates may work well for consolidation loans with bad credit. There are alternative options that can still help you pay off your debt if you are not qualified for a debt consolidation loan with a low enough interest rate.
You may have difficulty qualifying for a debt consolidation loan if your credit score is less than ideal. With any type of loan, borrowers with a strong credit profile have a better chance of getting approved, and they’re likely to receive better terms as well.
Getting a loan without a good credit score is possible. However, you should consider interest rates, sign-up fees, and other costs. You may end up with terms that make your loan even more expensive than your current debt.
CNBC Select compared dozens of lenders based on their credit score requirements, interest rates, fees, repayment terms, and other factors.
Is it possible to consolidate debt with bad credit?
Bad credit (a credit score under 670) can qualify for a debt consolidation loan. However, it’s important to pay attention to the terms. If you apply with a low credit score, personal loans for poor credit may at times charge more than credit cards.
If that’s the case, getting rid of your debt with a loan might not be the best option. Instead, think about other ways to deal with your balances. Depending on your current creditors, you might be able to negotiate repayment terms. In addition, credit counseling and debt management can be useful.
Can I get a debt consolidation loan?
In spite of debt consolidation loans for bad credit, approval isn’t guaranteed. Lenders typically examine a number of factors when evaluating an application, such as your income and debt-to-income ratio.
Under the Equal Credit Opportunity Act, lenders must disclose the specific reasons they denied your credit application within 60 days.
Consolidating debt has some downsides, right?
Consolidating debt might be the best debt repayment strategy, but it’s not for everyone.
The following are some disadvantages to consider:
- It is likely that you will end up with a higher interest rate. If you have less-than-ideal credit, or if you choose a long-term loan, you may still pay more in interest.
- Debt consolidation loans typically charge loan origination fees, which can be quite expensive if you’re dealing with a large amount of debt.
- When you merge multiple loans into one, you may feel a weight lifted off your shoulders. However, you might fall back into your old patterns once you feel free of debt if you don’t know how to live below your means or save enough. Avoid that by being disciplined about your budget and putting debt repayment first.
Is it easy to get approved for a debt consolidation loan?
It usually takes a few business days for the lender to make a decision. For a smooth application process, provide any documentation the lender requires with your application and respond promptly to information requests. However, many lenders may also approve you instantly.
What to look for when choosing a debt consolidation loan
When it comes to choosing a lender or financial product, shopping around is crucial. If you’re looking for the best debt consolidation loan, look beyond the APRs. You should also pay attention to other costs associated with the loan, as well as the interest rate. For example, some lenders charge origination fees up to 10% of the loan amount.
Make sure you pay attention to the lender’s extra features and user experience. For example, are there convenient ways for borrowers to manage their loans virtually? Can they chat with customer service online? You can also read customer reviews on websites such as the Better Business Bureau to make sure the lender offers a high level of customer service.
Bad credit debt consolidation loans: how to qualify
- Check your credit score: At AnnualCreditReport.com, you can get a free copy of your credit report from all three credit bureaus. You can also check your credit score for free on the LendingTree app.
- Research lenders in your credit band: You might not be able to get a loan from many lenders if you have bad credit, but that doesn’t mean you’re out of options.
- Check with local credit unions: It may be advantageous to use a credit union personal loan to consolidate debt if you have bad credit. Credit unions are not-for-profit, member-owned financial institutions that have membership requirements based on your location.
- Consider a cosigner: If you have bad credit, you might consider getting a cosigner for your debt consolidation loan from a friend or family member who has good credit. In case you can’t make payments on your debt consolidation loan, your cosigner will be liable for paying it back. Research lenders that allow cosigners if you want a personal loan with a cosigner, since not all lenders do.
- Apply for prequalification: If you have bad credit, even losing a few points from a hard credit inquiry could affect your chances of getting a loan. Since prequalification involves a soft credit inquiry, it doesn’t affect your credit score.
- Formally apply for the loan: As part of the application process, you may be required to provide documents that demonstrate your ability to repay debt, such as tax returns and pay stubs.
- Use the loan funds to pay off other debts: After you are approved, the lender will deposit the money into your bank account within a few days. You can use this money to pay off your debts, including credit cards and payday loans.
- Watch out for predatory lenders: A bad credit history can make you an easy target for predatory lenders that offer payday loans or car title loans. Although these loans don’t usually require a credit check, they have high-interest rates and short repayment terms that can trap you in debt.
Alternatives to debt consolidation loans
The terms of a debt consolidation loan might not be favorable if you have credit issues. Here are some alternatives to debt consolidation:
- Mortgage refinancing: If you already have a mortgage, you can replace it with a new one and use the difference to consolidate debt. This type of loan requires a credit score of at least 620.
- Negotiating with your lenders: You shouldn’t be afraid to ask your lenders and credit card issuers for help when managing your debt becomes difficult. It’s always best to keep open communication with your financial institutions, as they may be able to offer you a lower interest rate, develop a payment plan, or provide you with other arrangements to make your loan more manageable.
- Credit counseling: In a credit counseling program, an accredited expert will examine your financial situation and offer steps to improve it. They may suggest a debt management program in which the credit counseling agency sets up a payment plan with your lenders. Trusted organizations are nonprofit; they don’t charge for their services or request a flat fee. You can explore resources through the National Federation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA).
- Debt relief: The debt relief company can also negotiate with your creditors on your behalf for a fee. However, debt settlement has a risk since you are required to stop making payments while the negotiation is in progress. This can cause a huge hit to your credit score. Even worse, some lenders might try to sue you. As a result, you might consider debt settlement as a last resort.
If you do not qualify for another loan, what should you do?
You can still achieve your financial goals if you cannot get approved for a debt consolidation loan.
- Strategies for managing debt
By creating a budget, reining in some expenses, and using extra money, you can potentially pay off your existing debt on your own with discipline and a sensible debt payoff plan. You can also use debt payoff techniques to pay off the debt with the highest interest (debt avalanche) or the smallest balance (debt snowball).
- Boost your credit score
Improving your credit score is one of the best ways to improve your chances of getting a new loan. You may have a hard time improving your score, especially if you have missed payments in the past, but steady, responsible credit usage can help you rebuild it. Make on-time payments, improve your credit utilization ratio, or dispute potential errors to improve your credit score.
- Settlement of debts
By encouraging you to miss payments and avoid contacting creditors while the company negotiates with them, debt settlement services will negatively impact your credit score. Even if creditors cooperate with them, you’ll still have to pay a percentage of the starting debt even if they don’t have to work with them.
- Insolvency
Bankruptcy is a legal process in which certain types of debt can be discharged under certain conditions, some of which may allow creditors to repossess assets, and is only considered a last resort option. Furthermore, bankruptcy will adversely affect your credit score and your ability to borrow in the future.
Our picks for the best debt consolidation loans for bad credit
In order to determine the best debt consolidation lenders for bad credit, we reviewed over 25 lenders that offer personal loans. In order to make our list, lenders had to offer competitive annual percentage rates (APRs).
Accessibility: Personal loans are ranked higher if they are available to more people and have fewer requirements. This may include lower credit requirements, wider geographic availability, faster funding, and simpler prequalification and application procedures.
Rates and terms: There are lenders with more competitive fixed rates, fewer fees, and greater options for repayment terms, loan amounts, and lower annual percentage rates that we prioritize.
Repayment experience: To begin with, we look at each lender’s reputation and business practices. We also favor lenders that report to all major credit bureaus, provide reliable customer service, and offer unique benefits to customers.
Our top picks are reviewed and fact-checked monthly by LendingTree.
Best debt consolidation loans for bad credit
- Best overall: Achieve
- Best for people without a credit history: Upstart
- Best for flexible repayment terms: Upgrade
- Best for fast approval: LendingPoint
- Best for low origination fees: Avant
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