How to Get a Debt Consolidation Loan With Bad Credit

Having too much debt and bad credit scores can be discouraging. High balances can impact 30% of your credit score, so owing too much can hurt you even if you never miss a payment. And if you owe so much that you are missing payments, your credit scores will suffer even more. Consolidating debt to afford your bills and clear your balances can help improve bad credit quickly. How to get a debt consolidation loan with bad credit? It’s challenging, but possible.

How Bad Is Your Credit?

Debt consolidation isn't an option for everyone, and your eligibility for bad credit debt consolidation loans will depend on just how "bad" your credit score is.

According to FICO, good credit scores start at 670. Scores of 580 to 669 are deemed "fair," and 579 and under is "poor."

In this range, FICO says, "Your score is well below the average score of U.S. consumers and demonstrates to lenders that you are a risky borrower." 

That's why consumers with scores under 580 are unlikely to get approved for debt consolidation. You'll find more options available to you if you can improve your score (at least into the "fair" range) to increase your chances. Borrowing with a secured loan or a co-signer may open up more opportunities.

Types of Debt Consolidation Loan With Bad Credit

Suppose you are in the fair credit score range and can qualify for a possible debt consolidation loan. In that case, you have several debt consolidation options. 

Secured personal loans for bad credit

Secured loans are backed by collateral — like a car, boat, or another type of asset. These are typically your best option for consolidating debts because they're low-risk for lenders (meaning lower interest rates). In addition, they're less dependent on your income, credit, or general ability to repay.

Unsecured loans with a co-signer

Unsecured personal loans are another option, and your best bet is to get one with a trusted co-signer if at all possible. An unsecured debt consolidation loan with bad credit can be hazardous for lenders. So without a higher-credit co-signer on the application, you might not qualify.

Home equity loans and HELOCs with bad credit

If you own a home and have a lot of equity, a home equity loan or HELOC (home equity line of credit) could be an option. These have much lower rates than personal loans and depend more on the value of your home than your credit rating.

The right debt consolidation loan for bad credit depends on how low your credit score is, your access to a co-signer, and your overall financial picture. 

Debt Consolidation Loan Rates for Bad Credit

Bad debt consolidation loans aren't always the best choice, even if you can qualify with a lower credit score. Consumers with bad credit pay much higher interest rates on these loans in many cases. 

If you're considering a debt consolidation loan with bad credit, make sure you weigh the costs (both long-term and monthly) before signing on the dotted line. These loans are helpful if you can get a better rate (compared to the interest you're paying across all your debts now), reduce your monthly payment, or both.

How to Apply for a Debt Consolidation With Bad Credit

If you're thinking about applying for a debt consolidation loan with bad credit, pull your credit report first and check it for errors. If anything looks amiss, report it to the credit bureau and get it fixed ASAP. This can help improve your score and your chances of qualifying. Suppose you're applying for a home equity loan. In that case, your mortgage lender may be able to help you correct errors in a day or two by using a service called Rapid Rescore. 

Get prequalified before applying

You can typically get "prequalified" for a loan before actually applying for one. This allows you to gauge your eligibility and the potential costs and amount of the loan without a hard credit inquiry. (These inquiries lower your score and can make the process even more challenging.)

Get your credit score before applying

Most lenders require an estimate of your score when prequalifying you, and without one, their quote may be inaccurate. When pulling your credit report, you can get your score (there may be a small fee). Or you can sign up with Experian, or your bank or credit card issuer may allow you to check it for free. Avoid services that require a credit card to get a free score.

Improve your credit score if possible

Your credit score is never set in stone, so consider improving it before you apply for debt consolidation if yours is very low. Notify Alert credit bureaus of any errors on your report. Suppose your problem is a collection account (serious delinquency). In that case, you might be able to negotiate a "pay for delete" and get the item removed. 

And if you have family or friends with excellent credit, ask them to make you an authorized user on one or more accounts. You don't access their credit, but their good repayment history will appear on your report and can improve your scores.

Line up a co-signer

A co-signer can make it easier to qualify and reduce the interest rate and costs you'll pay for a potential debt consolidation loan. Make sure you choose one who has a solid income and a good credit score, as these will heavily influence your loan application. And make sure you can successfully pay your loan on time every month because late or missing payments can drag your co-signer's credit down with yours. 

Estimate your home equity

If you're a homeowner, see if you have enough home equity to qualify for financing. You can do this by subtracting your current mortgage balance from your home's market value. If you're unsure of its market value, use a home value estimator to get a good idea.

Note that with bad credit, you'll probably need more equity than a borrower with good credit. So if a lender allows prime applicants to borrow against 85% of their property value, it might only go to 75% for those with poor credit.

Shop around

Don't let the fact that you have bad credit make you shy about shopping for the best deal available to you. Prequalify with at least three lenders. Once you have estimates from each, compare the quotes line by line, and don't be afraid to ask questions if there's a number or fee you don't understand. Interest rates, terms, and fees can vary widely from one lender to the next, so shopping around can ensure you get the most affordable loan possible.

Once you've done all these preliminary steps and zeroed in on the best lender, it's time to fill out the complete application. You'll need to agree to a credit check, and in many cases, you must prove your income, bank account balances, and assets. Your lender can give you a complete list of what you'll need once you get started.

8 ways to improve your chances to qualify for a bad credit consolidation loan

It’s possible to qualify for a debt consolidation loan even if you have a low credit score. There are several steps you can take to increase your chances to qualify for a loan, like providing proof of steady income and applying with a cosigner. 

Understand your credit history

Knowing what factors may have an effect on your credit score will help you to understand where you can make improvements. To do that, you can get a copy of your credit report from the three major credit bureaus—Experian, TransUnion and Equifax—by visiting AnnualCreditReport.com. You’re entitled to a free online access to your credit report each week. 

Improve your credit score

Although improving your credit score may be a fast fix, having a higher score could increase your chances of securing a debt consolidation loan, and at more competitive rates. One way to help change your score quickly is by fixing any errors on your credit report.

Once you understand your credit history, you can take a look at what you can do. The most common ways borrowers can improve their scores are to:

• Pay bills on time

• Lower credit card balances

• Avoid applying for new credit cards and loans unless absolutely necessary

Reduce existing debt

Lenders look at your debt-to-income ratio, or DTI as one of the factors when deciding whether to approve you for a loan. A high DTI could mean lenders are more wary to lend you money.

To help lower your DTI, consider paying down some of your current debt. Even making extra payments, no matter how small an amount, can make a difference.

Prove consistent income

Lenders want to be confident in your ability to repay your loan, and that means showing you have enough income to do so. You’ll most likely need to provide documentation showing you have steady income as well. Proof can be through pay stubs, tax returns, and documents showing your income if you’re a contract worker or self-employed. 

Offer collateral

Collateral is money or an asset (like a car) you offer to the lender in the event you can’t pay back your loan. Putting up collateral is for secured loans and can help lenders feel more reassured. Think of it as a sort of safety net for the lender.

Before signing up for a secured loan, consider the risks and make sure you understand what your responsibilities are. If you are unable to repay the loan, you could lose your collateral.

Apply with a co-signer

A co-signer is another person on your loan application. Ideally this person will have a high credit score and positive credit history. This strategy can help you improve your odds of getting a debt consolidation loan.

Since this person is responsible for paying your loan if you can’t, choose someone who you trust. Speak with them to ensure the co-signer fully understands the responsibilities they're taking on.

Shop around lenders

Looking at what your options are ensures that you’re working with lenders who are more likely to approve your loan. Plus, it can help you find the best rates and terms for your financial profile. 

You can compare your loan options by prequalifying with several lenders. Doing so won’t impact your credit score.

What to Do if You're Turned Down for Debt Consolidation

Suppose your credit score is too low for a debt consolidation loan, the costs are too high, or you can't qualify due to other factors. In that case, there are alternatives to help you manage your looming debts.

Credit counseling can be your first line of defense. This can give you personalized guidance for your exact financial struggles. Many credit counselors offer debt management plans (DMPs), which allow you to make a single payment to cover your various debt payments. This prevents late payments and streamlines the payment process.

You may also be eligible for a debt relief plan in some cases. Debt relief means negotiating with your creditors and convincing them to accept less than what you owe as payment in full. You can contact creditors yourself or have a debt relief company negotiate on your behalf.

>>Check out Freedom Debt Relief reviews on YouTube

Need More Guidance?

If you're feeling trapped by your debts, there are ways out — even if your credit score isn't perfect. To determine which path is best for your situation, reach out to an experienced credit counselor or debt management company. They can help you get on track to a debt-free lifestyle.