How Does Debt Consolidation For Bad Credit Work?
Debt consolidation is a financial strategy where multiple debts are combined into a single loan with a lower interest rate or lower monthly payment. If you have bad credit, a debt consolidation loan could help. Some lenders offer personal loans specifically to borrowers with limited credit history or poor credit. This makes it a solid option for people who need a loan to consolidate their debt.
Oftentimes, the interest rate on a debt consolidation loan would be lower than what you pay on your individual accounts. If it is lower, you could save money on interest charges over time. You might also be able to reduce your monthly payment amount. Make your payments on time, and this kind of loan can help you avoid penalties and eventually resolve your numerous debts.
By getting a debt consolidation loan, you can streamline your monthly payments. Instead of paying several accounts every month, you’ll only need to pay one loan. Having only one monthly due date makes it harder to miss payments or incur late fees. This can also help if you have a history of missed payments and are trying to rebuild your credit score.
Who is Debt Consolidation Good For?
Debt consolidation is generally best for borrowers with a lot of high-interest debts or debts with variable annual percentage rates (APRs). You can use a debt consolidation loan for things like credit cards, medical bills, and payday loans.
Some banks, credit unions, and online lenders offer debt consolidation loans to people with bad credit. If you have a steady income and a lower debt-to-income ratio, you may have a higher chance of getting a loan with decent rates.
Here’s what’s generally considered bad credit:
- FICO (used by 90% of lenders) — 300 to 579
- Experian — 300 to 579
- Equifax — 280 to 559
- TransUnion — 300 to 600
Loan Calculator for Bad Credit
How to Get a Debt Consolidation Loan for Bad Credit
If you’ve weighed the pros and cons of debt consolidation and are still interested in applying for a loan, here’s how to do it:
- Check your credit. Get a free copy of your credit report and review it. There might be ways to improve your score before applying for a loan. This could get you more competitive interest rates.
- Compare lenders. Shop around until you find the lender with the best rates and terms. You may be able to prequalify to see your potential rates without affecting your credit score.
- Apply online. You can typically apply for a debt consolidation loan online. This might affect your credit score.
- Wait for the decision. The lender will review your information and approve or deny your application.
- Receive funds. If approved, you’ll usually receive the money within a couple of business days (depending on the lender). You can then use the funds to consolidate your debts.
- Start making payments. Make on-time payments on your new loan until it’s paid off.
Debt Consolidation Loans: What to Consider
Every loan — including debt consolidation loans — comes with its benefits and drawbacks. Make sure you consider these before applying for one.
Here are the main advantages of debt consolidation loans for bad credit:
- Having one monthly payment makes it easier to make on-time payments.
- It could help you build your credit score.
- Makes it easier to keep track of your debt.
- Your monthly payment amount could be lower than your original debts, especially if you get a lower overall interest rate.
- These loans come with a fixed repayment schedule.
And here are the main drawbacks:
- Debt consolidation makes your outstanding debts more manageable, but it doesn’t get rid of them.
- If you take out a loan that’s bigger than you need, you could end up in more debt than you originally had.
- Some lenders charge additional fees or require you to have a minimum debt amount.
- Bad credit could mean higher APR and limited options.
Pros and Cons of Debt Consolidation Loans
Thinking about a debt consolidation loan for bad credit? Here are the main advantages and disadvantages.
Pros of Debt Consolidation Loans for Bad Credit
- Could save you money on interest payments over time
- May be easier to qualify for than other debt consolidation loans
- Having one loan with a fixed monthly payment can make it easier to pay down debt
- Loan terms may be flexible
- Can potentially reduce monthly payments, simplify the repayment process, and improve credit scores over time.
Cons of Debt Consolidation Loans for Bad Credit
- Loan amounts may be lower for bad credit borrowers
- Higher interest rate than loans for good credit borrowers
- Not all lenders offer these loans
Other Debt Consolidation for Bad Credit Options
There are several ways to consolidate debt — even if you have bad credit. These include:
- Personal loan: A personal loan can be used for nearly anything, including debt consolidation. These loans typically have a set repayment term of 12 to 60 months. They also have a fixed monthly payment and interest rate. Loan amounts range from a few hundred dollars to over $100,000. Your credit score will determine your loan amount, rate, and terms.
- Balance transfer credit card: A balance transfer lets you move your existing credit card balance to a new card — usually for a small fee. Some balance transfer cards have a 0% introductory rate for around six to 21 months. This means the card won’t incur interest during this time. If you pay off the full balance before the introductory period ends, you could save hundreds or thousands of dollars in interest. You may need fair or better credit to qualify.
- 401(k) loan: If you have a 401(k) retirement plan, you might be able to take out a loan using the funds in your account. The maximum loan amount is $50,000 or 50% of your balance, whichever is lower. You don’t need good credit for this option.
- Home equity loan: If you’re a homeowner, you may qualify for a home equity loan. These loans use your home equity as collateral. This means you could lose your property if you don’t pay back what you owe. You may be able to borrow up to 80% of your equity. You can use this money for things like home improvements or debt consolidation.
- Debt settlement: Debt settlement involves working with your creditors to reduce what you owe. This process comes with some risks and can damage your credit score. But it can also make it easier to pay down your debts over time.
Should You Get a Debt Consolidation Loan?
A debt consolidation loan might be a good idea if you:
- Want to pay down your debts faster
- Struggle to keep up with multiple monthly payments
- Want to reduce how much you pay in interest
- Are trying to improve your credit score
- Want to reduce financial stress
How to Apply For a Bad Credit Debt Consolidation Loan
Before you apply, add up your existing debts to see how much you need to borrow. You can use a debt consolidation calculator to estimate your monthly payments on the new loan. This will help you determine whether you can afford the loan — and if it’s the best option for you.
Different lenders might have additional fees, such as origination or prepayment fees. They might also require you to have a minimum — or maximum — amount of debt to consolidate.
Compare offers and eligibility requirements from multiple lenders, too. This can help you find the best rates and terms. Typical eligibility criteria include:
- Steady income
- Minimum credit score
- Maximum 40% debt-to-income ratio (excluding mortgages)
- 18+ years old
Average Debt Consolidation Loan Rates
The interest rate on a debt consolidation loan is mostly based on your credit score. If you have bad credit, you can generally expect a higher interest rate. Here are a few debt consolidation loan lenders and their minimum and maximum APRs:
| Lender |
APR (Fixed) |
Minimum Credit Score |
| Bankrate |
6.24% to 35.99% |
550 |
| 5kFunds |
5.99% to 35.99% |
None |
| LendingTree |
5.99% to 35.93% |
550 |
| LoansUnder36 |
5.99% to 35.99% |
550 |
| Lending For Bad Credit |
6.99% to 35.99% |
None |
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