How to get a debt consolidation loan with bad credit
Bad credit limits your debt consolidation options, but loans do exist
Having bad credit can make life more difficult and expensive, especially when you need to pay down debt. Not only does a low credit score leave you paying higher interest rates each time you borrow money, but you'll be denied loans with better rates or repayment terms.
While the FICO scoring model describes credit scores below 580 as "poor,” VantageScore considers scores below 600 as “subprime.” If your credit score falls into these ranges, you'll be limited when it comes to debt consolidation options, including debt consolidation loans.
- If you have a FICO score below 580 or a VantageScore of 600 or lower, your credit score is considered "poor" or "subprime."
- Limited debt consolidation options are available to consumers with this credit rating, and most loans in this category charge high rates and more fees.
- Improving your credit score can help you access better debt consolidation options, but making progress on your credit can take time.
Debt consolidation loan options for bad credit
Some debt consolidation loans may be available even if you have imperfect credit, including the following:
- Credit union loans: Because credit unions are nonprofits that exist to provide resources and services to members, many have more flexible lending requirements than traditional banks. If you're a member of a credit union or willing to join one, credit union loans may be your best bet for debt consolidation with bad credit.
- Online lender loans: Online lenders sometimes extend personal loans to consumers with a wider range of credit scores. For example, online lender Upgrade has a minimum credit score requirement of 560 for debt consolidation loans.
- Alternative lender loans: Some lenders look at more than just your credit score, which can be helpful for people with bad credit but otherwise solid money management skills. As one example, the lender Upstart considers alternative data such as banking history when approving applicants for funding.
- Secured loans: Secured loans require you to put down collateral, such as money in a savings account or the title to a car you own. Because the lender can seize your collateral if you fail to repay, these loans can be easier to get approved for.
What to look for in a debt consolidation loan for bad credit
According to Karyn Rando of Consumer Credit Counseling Service of Rochester in New York, people with bad credit are less likely to get approved for debt consolidation loans that don't require collateral. However, that doesn't mean people with bad credit are never approved for funding.
If you’re in need of debt consolidation but have bad credit, you'll want to compare lenders and funding options side by side. Below you'll find a rundown of all the factors to consider and loan terms to look for.
If you have bad credit, look long and hard at the interest rates presented to you. Unfortunately, due to poor credit, the new rate may not be any better than the rates you're paying now, so applying may not be worth it.
"Bad credit equals high interest rates, and high interest rates mean that you will be paying more money throughout the life of the loan," said Rando.
Many lenders that offer debt consolidation loans charge an upfront origination fee, and sometimes these fees are assigned based on a person's credit rating.
For example, LendingClub charges origination fees between 2% and 6% on their personal loans, and it says the "exact amount depends on your personal credit history."
Remember that origination fees are deducted from the loan amount you qualify for upfront, and they add to the cost of borrowing. For example, if you apply for a $10,000 debt consolidation loan with an origination fee of 6%, your fee equals $600, and you'll only get $9,400 in funding to use for debt consolidation.
Make sure you understand what your monthly payment is and how long you have to pay it off. Lenders with broader repayment options may offer lower monthly payments since you can pay off your debt over a longer timeline, whereas lenders with shorter repayment terms will require you to pay more each month.
Either way, you'll want to know what your new loan will cost you on a monthly basis and over the duration of repayment, including the full amount in interest and fees you'll pay.
A warning: As you compare borrowing options, keep an eye out for predatory loans with sky-high interest rates. This includes loans from a range of online lenders that charge exorbitant rates, as well as payday loans. These companies specifically target people who feel like they have no other options, but you can easily spot them by reading over their interest rates, fees and fine print.
How to get approved for a debt consolidation loan
If you need to pay off debt, getting approved for a debt consolidation loan with better rates and terms can help. The following steps may improve your chances of getting the funding you need:
1. Get preapproved before you apply
Many online lenders let you check your rate and gauge your approval odds before you apply. This gives you the chance to see how your new loan terms might look if you move forward with an application. The step requires only a "soft pull" on your credit report, which won’t affect your score.
2. Improve your credit score before you apply
Improving your credit score before you apply for a loan can also yield much better results. Getting your score into at least the "fair" or "prime" range can pave the way to more affordable loan options, and this can help you pay less interest or secure a monthly payment that makes more sense for your finances.
Steps you can take to improve your credit include paying all bills on time, paying down debt to lower your credit utilization ratio and refraining from opening or closing too many credit accounts. You can also use a program like Experian Boost to get credit for bills you pay, like for internet, electricity, streaming services and rent.
3. Check your credit reports
If you have false information on your credit reports, including incorrect balances or falsely reported late payments, your score could be lower through no fault of your own. Check your credit reports for free using the website AnnualCreditReport.com, and verify all the information found with all three credit bureaus — Experian, Equifax and TransUnion.
If you find errors on your credit reports that could be dragging your score down, disputing the incorrect information is your next step. Disputing errors in writing with all three credit bureaus and the business that reported the information can lead to the false information being removed, which can ultimately boost your score.
4. Compare multiple lenders
Finally, make sure you shop around for lenders that specifically offer loans for people with poor credit. This ensures you only apply at institutions that are more willing to extend you credit. Then, you can compare the loan options based on interest rates and fees.
What if you still don’t qualify for a debt consolidation loan?
If you can’t get approved for new funding, Rando, from CCCS of Rochester, says it may be possible to get better rates on your current loans instead. For example, she says calling your creditors directly to see if they have any internal repayment options is a worthwhile option, and that some creditors and credit card companies will temporarily reduce your interest rate or accept lower monthly payments for a period of time.
Another option is a debt repayment program (also called debt management plans, or DMPs), which requires you to work with a third-party company that helps you manage the repayment of your debt. Rando said this type of program can leave you with "one monthly payment, lower interest rates, lower monthly payments, waiving of overlimit or late fees, and no more collection calls being made to your home."
Finally, you can consider debt settlement, in which you settle your debt for less than you owe. These services are offered through companies that negotiate with creditors on your behalf. It’s important to understand the fees and potential effects on your credit score before choosing debt settlement.
What is a bad credit score?
What is considered a "bad" credit score depends on the scoring model. The FICO scoring model puts scores of 300 to 579 in the "poor" category, whereas VantageScore lists scores of 300 to 600 as "subprime.”
Does debt consolidation improve your credit score?
Debt consolidation can improve your credit score if you use the funds to pay off revolving credit and you make on-time payments on your new loan. However, applying for a loan will result in a new hard inquiry on your credit report, and this can cause your score to drop temporarily.
How long does it take to fix bad credit?
How long it takes to fix bad credit varies based on the specific situation and steps taken. It could take a few months to see some progress, but more serious problems could take years to fix.
What’s the difference between a secured and unsecured loan?
Secured loans require collateral, such as the title to a car you own, that the lender can seize if you fail to repay the loan. Unsecured loans do not require collateral.
Having bad credit can make it difficult to qualify for a debt consolidation loan with a lower rate and better terms than you have on existing debt. That said, you won't know if you can get a better loan unless you take the time to look, so shopping around and comparing loan options is your best move. You can also spend some time improving your credit before you move toward debt consolidation as a debt relief strategy.
- Article sources
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page. Specific sources for this article include:
- FICO, "What is a Credit Score?" Accessed Feb. 22, 2023.
- VantageScore Solutions, “The Complete Guide to Your VantageScore.” Accessed Feb. 22, 2023.
- Federal Trade Commission, "Disputing Errors on Your Credit Reports." Accessed Feb. 11, 2023.
- Experian, "How Long Does It Take to Repair Your Credit?" Accessed Feb. 11, 2023.
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