How to Get a Debt Consolidation Loan With Bad Credit
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A debt consolidation loan is a personal loan you use to combine and pay off multiple debts at once — think credit card balances, medical bills or other unsecured personal loans — so you’re left with only one monthly payment.
You can get a debt consolidation loan even if you have bad credit (a credit score below 630). Some lenders cater specifically to borrowers with lower credit scores.
Here's how to get a debt consolidation loan for bad credit and how to know if a debt consolidation loan is the right fit for you.
How to get a debt consolidation loan with bad credit
1. Pre-qualify with multiple lenders
To get the best deal on your debt consolidation loan, you’ll want to compare interest rates and terms from multiple lenders, and the easiest way to do that is by pre-qualifying.
Pre-qualifying just means filling out a short application on the lender’s website and submitting to a soft credit check, which won’t hurt your credit score. You can then view your estimated annual percentage rate with that lender. You’ll want a rate that’s lower than your existing debts, which allows you to save money and get out of debt faster.
Almost all online lenders offer pre-qualification, as well as some banks and credit unions. You can learn more about where to shop for a loan and how to boost your chances of pre-qualifying lower down.
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2. Submit your application
Once you’ve pre-qualified and chosen a lender, it’s time to officially apply for the loan. This process is usually online, and you’ll be asked to provide personal information, including your Social Security number, and any required documentation that verifies your identity, income and employment.
Many lenders can make an immediate approval decision, though some may take a few business days to get back to you.
» MORE: How to apply for a personal loan
3. Get funded
Once you’re approved, you’ll receive the loan documents, which you can usually sign electronically. Make sure to read the documents carefully before signing.
Lenders can deposit the funds directly into your bank account, though some may offer direct payment to creditors, which means the lender pays off your creditors for you, simplifying the process — and eliminating any temptation to use the cash for something else.
Though funding time varies, many online lenders offer same- and next-day funding.
4. Pay down debt and keep up with loan payments
Once you receive the funds in your account, use them to pay off your debts. If the funds are being sent to your creditors for you, confirm with each creditor that your debt was successfully paid off.
Next, make a plan to manage your loan, which may include building a budget that prioritizes your new monthly payment and keeping an eye on any refinancing opportunities.
Most lenders charge a late fee for missed payments — and report them to the credit bureaus, which can hurt your score — so consider setting up automatic payments to avoid falling behind.
Where to get a debt consolidation loan for bad credit
Online lenders
Online lenders are convenient and provide fast funding, but some may charge high rates for bad-credit borrowers.
Online lenders may also charge origination fees that cover the costs of processing your loan. The fee is typically deducted from the loan proceeds, so you might have to request a larger loan to get the full amount you need.
Upgrade is one of the best online lenders for a bad-credit loan. If you get a debt consolidation loan and have Upgrade send the funds directly to your creditors, you can qualify for an additional rate discount of 1 to 3 percentage points, which lowers the amount of interest you pay.
Upstart also accepts applications from borrowers with bad credit and will evaluate alternative data on your application, like college education and work history, which could boost your odds of approval and getting a low rate.
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Credit unions
Credit unions are not-for-profit financial organizations that may offer more flexible terms and lower rates than online lenders.
Federal credit unions cap annual percentage rates on personal loans at 18%.
Some credit unions don’t allow you to pre-qualify for a loan, so you’ll need to formally apply, which requires a hard credit check. Since this temporarily lowers your credit score, it makes it harder to shop around.
You also need to become a member of the credit union to apply for a loan, which may mean living or working nearby and paying a small membership fee (this can be as low as $5). A local credit union is a good place to start, though national credit unions also offer debt consolidation loans.
» COMPARE: Best credit unions for personal loans
How to qualify for a debt consolidation loan with poor credit
Check your credit report
Are mistakes on your credit report the reason your score is low? Errors are more common than you think. Check for things like wrong accounts, incorrectly reported payments or inaccurate credit limits.
You can check your credit report weekly for free at each of the three major credit reporting bureaus — Experian, Equifax and TransUnion — using AnnualCreditReport.com.
Even a small bump in your credit score may increase your odds of qualifying for a debt consolidation loan. Going from a bad to a fair credit score (630 to 689) could also lead to a more affordable loan with a lower interest rate.
Another tip is to pay off any small debts you see listed on your credit report. This lowers your credit utilization, which accounts for 30% of your credit score. It can also improve your overall debt-to-income ratio, which lenders use to evaluate your ability to repay a loan. The lower the DTI ratio, the more likely a lender may approve your loan application.
Consider a secured, co-signed or joint loan
Some types of personal loans may be easier to qualify for, including a secured, co-signed or joint loan.
With a secured loan, you use collateral like a car or savings account to help guarantee the loan, which means lenders may be more likely to approve you or extend a lower interest rate. But if you fail to pay back the loan, you lose the collateral.
Adding a co-signer with a better credit score or higher income than you can also boost your chances of approval. However, note that a co-signer takes on equal responsibility for the loan, even though they don’t have access to the funds. If you miss payments or fail to repay the loan, your co-signer’s credit score may suffer.
Joint loans are similar to co-signed loans, but the co-borrower has equal access to the funds.
Is a debt consolidation loan a good idea?
If you’re struggling to pay off debt and can qualify for a low enough interest rate on a loan, debt consolidation is generally a good idea.
Here are some of the benefits:
It saves money on interest. Arguably the biggest benefit of debt consolidation is the money you save on interest by consolidating debt under a lower rate. Even a couple of percentage points makes a big difference in overall interest saved. Use our debt consolidation calculator to see your potential savings.
You may pay off debt faster. When you consolidate at a lower interest rate, you can get out of debt faster by applying the savings to your remaining balance. You can also choose a short repayment term on a debt consolidation loan, as long as you can afford the monthly payments.
It simplifies the process. Instead of keeping track of multiple debts, with a debt consolidation loan, you’ll have only one payment to make. Debt consolidation loans also have fixed terms, so you’ll know your payoff date, which can help keep you motivated.
It could build your credit. Though taking out a debt consolidation loan will temporarily knock a few points off your credit score, the overall effect should be positive as you start to dig out of debt.
Debt consolidation loan alternatives
If debt consolidation loans won't work for you, here are some possible alternatives.
Other debt payoff methods
The debt snowball and debt avalanche methods are popular strategies for paying off debt without consolidating.
The snowball method uses early wins to keep you on track to becoming debt-free. In this method, debts are arranged from the smallest balance to the largest. Once the smallest debt is repaid, the monthly payment for that debt goes toward the next-smallest balance until that's paid off. Then, you continue to roll payments toward each debt until you're debt-free.
The avalanche method follows a similar strategy, but it starts with your highest-interest debt. Then when that’s paid off, you tackle the second-highest-interest debt and so forth until all debts are paid. This approach can save money and ultimately time, but it may not have the quick wins of the snowball method.
Debt management plan
A debt management plan from a nonprofit credit counseling agency can help reduce your interest rate and pay off debt faster. It’s an option if you have credit card debt and if you can stick to a payment plan for several years while not using the credit cards.
Bankruptcy
Discharging your debts in bankruptcy may be an option if you are overwhelmed by debt and it will take five years or longer to repay it through consolidation. Bankruptcy wipes out most kinds of unsecured debt, including credit cards and medical bills.
While your credit score may initially take a hit, it should begin to recover within a few months after filing for bankruptcy.
» MORE: What to know about bankruptcy
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