Can You Get a Debt Consolidation Loan with Bad Credit?

A consolidation loan combines multiple existing debts into a new loan with a single monthly payment and can be a place where people with bad credit rehabilitate their credit histories.

Consolidation loans aren’t easy to secure for people with bad credit because they have not demonstrated consistent payment practices. Improving their credit score, finding a co-signer for the loan, or getting a secured loan are necessary steps tor improving their chances of getting a debt consolidation loan.

However, experts say that a consolidation loan proves most effective when it is part of a comprehensive approach to debt reduction, such as reducing use of credit cards and creating a workable budget.

“It’s common for me to see people have credit card debt again after a debt consolidation loan simply because they didn’t address and resolve the underlying issues of the debt in the first place,” said Leslie H. Tayne Esq., Finance and Debt Expert and Founder of Tayne Law Group in Lebanon, Oregon.

Debt Consolidation Loan Approval Factors

Regardless of credit score, approval for debt consolidation loans depends on a number of factors. The more boxes a borrower can check when applying for a debt consolidation loan, especially if that borrower has poor credit, the better the chances of approval.

Certainly it’s more difficult to qualify for bad credit debt consolidation loans but it’s not impossible once you understand how lenders weigh different factors.

1. Credit Score & History

Pay attention to fluctuations in your credit score. A score in the 670-700 range is considered good, so you probably won’t have to jump through too many hoops to take out a debt consolidation loan.

But if you have poor credit – the 300-559 range – getting a loan will require some creative financial work.

Your payment history makes up 35% of your credit score so chances are if you have a poor credit score you’ve made late payments or you have missed payments altogether somewhere along the way.

How many payments you missed and how recently that happened can impact your chances of getting out of debt with bad credit.

“Recent instances of late payments, charge-offs, or collections significantly reduce the likelihood of approval,” Arshaluis Akhmedov, CEO at Pro-Creditscore in Los Angeles, said. “Lenders seek evidence of the borrower’s ability to consistently make on-time payments.”

2. Income and Employment

How much do you earn? How much do you owe?

While the process of getting a debt consolidation loan is certainly more complex, especially with poor credit, many lenders ask those questions as a starting point in assessing your risk as a borrower.

Having a stable income and steady employment is a step toward loan approval but unfortunately not the final step. Debt-to-income ratio is at least as important.

What is DTI? Your debt-to-income ratio is your monthly debt – credit cards, car loans, mortgage, etc. – divided by your gross monthly income. A DTI of 40% or less can tell lenders your debt is a reasonably manageable portion of your income.

3. Application-Related Factors

If at first you don’t succeed in getting a debt consolidation loan with bad credit, try again. But only after examining the reasons for debt consolidation loan denial.

The biggest reasons – low credit score, insufficient income, high credit utilization – are fairly obvious. But application errors such as mistakes in financial data, insufficient documentation and simple typos in personal information can also sabotage your chances.

Be diligent, but careful when applying for a debt consolidation loan. Loan applications trigger a “hard inquiry” – lenders checking your credit report – that can temporarily lower your credit score.

“Unnecessary credit inquiries can suggest financial desperation,” Akhmedov said. “It is recommended to apply selectively to lenders experienced in working with subprime borrowers.”

How to Increase Approval Odds for Bad Credit Debt Consolidation Loans

Getting a debt consolidation loan is possible but finding one at an interest rate and monthly payment that fits your budget can be difficult.

There are steps you can take to increase your approval odds even with suspect credit, but it will take a systematic approach. It starts with improving your credit score, but includes shopping for a better deal, finding a co-signer for the loan and perhaps even getting a secured loan.

“Every lender is different, and will have different requirements, but credit score does largely determine whether an applicant gets approved, and if so, what rate the lender can offer,” Kyle Enright, president of lending at Achieve, said.

“In most cases, applicants with higher credit scores will receive the lowest rates. At Achieve, for example, borrowers should have a minimum credit score of 620, but many lenders will lend to consumers with lower scores; they will just be offered a higher interest rate.”

Improve Your Credit Score

A poor credit score is a bright red flag, but it doesn’t have to lead directly to waving the white flag in applying for a debt consolidation loan.

There are various ways to improve your credit score, but patience is a key component. You must start by making on-time payments on all bills, but especially credit cards. Spending less with credit cards can provide another significant boost to your credit score.

“Credit score rehabilitation timelines are variable, dependent on the individual’s credit profile; however, improvements can occur more rapidly than many individuals anticipate,” Akhmedov said. “Initial improvements, such as small score increases, can manifest within 30–45 days, particularly if errors are rectified or credit utilization is reduced.

“Moderate repair, which entails meaningful improvements of 50 to100-plus points, often occurs within 3–6 months when the borrower addresses both negative items and engages in positive credit-building activities.”

Shop Around Before Choosing

Not all lenders are impossible to deal with when it comes to getting a consolidation loan with bad credit. Some lenders offer greater flexibility.

If you need time to repair your credit, use that time to shop around. If your credit score is already on the upswing, shop around anyway with credit unions, secure loan lenders, and online personal loan lenders. They may be more flexible than traditional bank lenders when deciding whether to give you a loan.

“These lenders often consider more than just the consumer’s credit score, such as income, employment history, etc., which will make it easier for borrowers with past credit challenges to access consolidation loans and rebuild financial stability,” Tayne said.

Get a Cosigner

A trusted family member or friend with a stable income and good credit score, who is willing to join the application process as a co-signer, can greatly increase your chances of consolidation loan approval.

Coming to the table with a co-signer can decrease the financial risk in the eyes of a lender. But it’s a step that can raise the personal risk of a ruined relationship if you’re unable to hold up your end of the agreement.

Transparency is key. Share all the details of your finances with any potential co-signer. Talking it out and putting everything into writing can reduce the chances of surprises down the road and hard feelings that can last a lifetime.

Opt for a Secured Loan

A secured loan differs from an unsecured loan in that the borrower puts up collateral such as a house or a car to back the loan. Because collateral mitigates the risk for the lender, the loan terms are often more favorable for borrowers with bad credit.

If you cannot find a co-signer for a debt consolidation loan, a secured loan might be the best option for borrowers who either can’t qualify for a traditional debt consolidation loan or can’t qualify at an interest rate that meets their budgets.

“Depending on how bad the consumer’s credit history is, having a co-signer or collateral attached to the loan can greatly improve their approval odds,” Tayne said. “If they can also reduce or pay off their outstanding debt balances that are impacting their score, which can greatly help their chances for approval.”

Alternatives to Debt Consolidation Loans

Do your homework before you apply for a debt consolidation loan. If your credit isn’t in the good or excellent range, do yourself an even bigger favor by exploring debt consolidation loan alternatives.

If the terms of a debt consolidation loan leave you struggling to make payments, or – in the case of a secured loan – put you at risk of losing your home or car, you should definitely investigate other debt repayment strategies through a debt attorney or nonprofit credit counseling agency.

You can also investigate home equity options or any number of budgeting apps that help you rein in reckless spending.

“Most people know they should budget, but relatively few actually do,” Enright said. “In some cases, developing an actual budget – whether with an app, spreadsheet, or pencil and paper – can more clearly identify areas to cut, thereby eliminating the need for a loan.”

Depending on the extent of your debt crisis, debt settlement and filing for bankruptcy might seem like the only way out. Just know that both bring long-term damage to your credit.

Next Steps

If you’re considering a debt consolidation loan, start by taking a good hard look at your credit report.

Understand what constitutes a bad credit score. Make sure there are no mistakes on your credit report such as unregistered debt payments.

“Disputing an error on a credit report will likely lift the consumer’s credit score in 30-60 days,” Tayne said. “Also, it’s important to remember that disputing a debt isn’t the same as repairing your credit, as it’s usually temporary.

“Accurate, valid debt will still be reported. True credit repair comes from reducing debt, making on-time payments, and allowing time for past delinquencies or negative marks to age.”

If that seems like an overwhelming undertaking, a smart solution is to contact a debt attorney or a nonprofit credit counseling agency. Look for an agency accredited by the National Federation for Credit Counseling.

“If the need for a loan stems from carrying too much credit card debt, debt management plans might help in some cases.,” Enright said. “These plans, offered by credit counseling firms that maintain agreements with credit card issuers, can lower the interest rate on a credit card, thereby freeing up some cash for other purposes.”

Rebuilding damaged credit takes more than just time. Often it takes a helping hand.

Nonprofit credit counseling agencies offer advice on everything from developing a sound monthly budget to devising a debt management plan (DMP) that reduces the interest rate and monthly payment. You pay the agency; the agency pays the creditor, and the debt is eliminated over a 3–5-year period.