How to Consolidate Debt With Bad Credit - Experian (2024)

How to Get a Debt Consolidation Loan if You Have Bad Credit

Getting approved for a personal loan to help consolidate your debt can be difficult with a low credit score, but it isn't out of the question. If you think it's possible to get better terms than what you're currently paying, here are some steps you can take.

1. Review Your Credit

A poor credit score ranges from 300 to 579, according to FICO. Finding out where you fall can make it easier to assess your situation and options.

You can start by registering with Experian to get free access to your FICO® Score☉ and Experian credit report, and also get free weekly copies of your credit reports with Equifax and TransUnion through AnnualCreditReport.com.

Doing this can help you get a full picture of your overall credit health. You can also look out for errors and other negative items that could be hurting your score. Depending on how urgent your situation is, you may be able to make some improvements to your credit score before you apply to improve your standing.

Learn more >> How to Improve Your Credit Score

2. Shop Around

Not all lenders are willing to work with borrowers who have bad credit, so it's important to do your research.

Focus on lenders that say they accept lower credit scores, and, when possible, go through the prequalification process with each to get an idea of your approval odds and possible loan terms.

In addition to interest rates, it's also important to compare fees, monthly payments, repayment terms and any other features that are important to you.

3. Consider Ways to Boost Your Approval Odds

Before you submit an application with a lender, think about some ways you can increase your chances of getting loan terms that can help you save money. Options include:

• Get a cosigner. Some personal lenders allow you to add a cosigner to your application or open a joint loan. With this option, the lender will review both credit histories to make a decision, so if you have a loved one with stellar credit and a strong income, it could make it easier to get approved for favorable terms you can't on your own.
• Consider a secured loan. Some lenders also offer secured personal loans that allow you to use an asset, such as a vehicle or investment account, as collateral. This arrangement can make it easier to get approved and also to secure better terms compared to an unsecured loan.

4. Submit Your Application and Accept the Loan

Once you've decided on a lender, you can typically submit your application online. The lender may provide you with a decision the same day or even in minutes.

If you're approved, carefully review the loan agreement to ensure you know what you're getting. Then, accept the loan by signing the contract. Depending on the lender, you may choose to have them pay off your debt directly or send the money to your bank account, so you can pay off the balances you want to consolidate.

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Can You Get a Debt Consolidation Loan While Unemployed?

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See Also

How to consolidate your debt | Debt consolidation loan | BarclaysBest Debt Consolidation Loans for 2024What is a Debt Consolidation Loan? Qualifying; Making Payments5 smart alternatives to debt consolidation loans

Where to Get a Debt Consolidation Loan With Poor Credit

There are several types of lenders that can help you get the money you need to consolidate your debt. That said, each lender has its own criteria for determining eligibility and loan terms, so you'll want to cast a wide net as you shop around.

Online Lenders

You're more likely to find online lenders that are willing to work with bad-credit borrowers, particularly if you don't have the necessary assets for a secured loan. This is largely because online lenders don't have physical branches, so they don't have the same overhead costs as banks and credit unions and can afford to take on more risk.

Keep in mind, though, that some online lenders charge higher annual percentage rates (APRs), which can make a consolidation loan difficult to justify.

Credit Unions and Banks

Some credit unions and banks may also be willing to lend to you if you have a lower credit score, particularly if you have an established relationship with a smaller financial institution. Credit unions and banks are more likely to offer secured loans, which can be a good way to get better terms if you can come up with the collateral.

Pros and Cons of Debt Consolidation Loans

When Is a Debt Consolidation Loan a Good Idea?

The decision of whether or not to get a consolidation loan ultimately depends on your financial situation and goals. Here are some situations where it can make sense, even if you have bad credit:

• You're prequalified for a lower interest rate than what you're currently paying.
• You have a plan to avoid adding new debt.
• Your budget will benefit from a single monthly payment rather than multiple.
• The new loan can help you pay down your debt faster.
• You have a cosigner or collateral that you can use to get better terms.

Alternatives to Debt Consolidation Loans

While a debt consolidation loan can be a good choice in some situations, it's important to research and compare other options to ensure you find the best one for you. Here are some to keep in mind.

New Budget

Making a budget and tracking your expenses is crucial to determining how much you can afford to pay toward existing debt each month. With a workable budget, you can set aside a given amount for your debt payments and inch toward your goal of eliminating your debt.

If you don't have a budget or your current one doesn't allow you to put more toward your debts, create a new one. If you're not sure where to start, a budgeting app could help

Home Equity Loan or HELOC

If you have a home with equity, you could pull out a portion of it to pay off debt through a home equity loan or home equity line of credit (HELOC).

Home equity loans offer a lump-sum payment you must repay over five to 30 years at a fixed interest rate. By contrast, a HELOC gives you an open line of credit you can draw from multiple times as needed up to your credit limit.

Note, however, that these loans can come with hefty closing costs, and if you fail to repay, you could face losing your home.

Learn more >> Home Equity Loan vs. HELOC: What's the Difference?

Accelerated Debt Repayment Strategies

A good debt reduction plan can provide a roadmap to eliminating debt and help you track your progress. The most common repayment strategies are the debt avalanche and debt snowball methods.

In both cases, the idea is to make minimum payments on all your debts but prioritize one account by making higher payments on that one. The debt avalanche method has you focus on paying off the account with the highest interest rate first and repeating the process until your debts are paid off. This strategy can help you save money on interest charges over time.

Conversely, the debt snowball method prioritizes paying off your accounts with the lowest balances to create quick wins and build momentum.

Credit Counseling

If you are overwhelmed with debt and need help finding a way to pay it off, credit counseling may help. A nonprofit credit counselor can work with you to strategize debt payoff and may recommend a debt management plan (DMP).

With a DMP, your credit counselor helps you determine how much you can put toward your debt each month and attempts to negotiate reduced interest rates, fees and monthly payments with your creditors. You make one payment to the credit counselor, who then distributes it to your lenders until your debts are paid off.

DMPs typically last three to five years and come with modest setup and monthly fees.

Learn more >> Is a Debt Management Plan Right for You?

Frequently Asked Questions

• Debt consolidation involves using a loan or credit card to pay off other debts. Depending on the lender, you may receive the funds to pay off the debt on your own or request that the lender pay your existing lenders directly.

• Debt consolidation can impact your credit in both positive and negative ways. However, any negative effects are typically temporary in nature, especially if you practice responsible credit habits.

  To use a consolidation loan to build your credit, avoid adding more debt as you work to pay down your balance, and also make it a priority to pay on time every month.

• There's no universal minimum credit score requirement to get approved for a consolidation loan. Some lenders are even willing to work with bad-credit borrowers. That said, a lower credit score typically translates to higher interest rates and fees, which can make debt consolidation less viable.

Improve Your Credit—and Your Options

While you may qualify for a debt consolidation loan with bad credit, you'll likely pay more in interest rates. By taking a few months to improve your credit, you could boost your odds of approval for debt consolidation loans and other types of credit and with lower interest rates. Even a slightly lower interest rate could save you hundreds or even thousands of dollars over the life of the loan.

By checking your credit report, you can keep an eye on the total amount of debt owed to all your creditors that report to Experian and receive recommendations on how to save money and improve your credit score over time.