Alternatives to Debt Consolidation Loans with Bad Credit

    Loans are not the only way to consolidate credit card debt. If you have poor credit, these options are better alternatives.

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    Consolidation loans are a great solution to unmanageable debt if you can make the numbers work. The process usually means negotiating down your debt then rolling all of what remains in a single monthly payment. The hitch: bad credit and debt consolidation often don’t mix. That’s a gigantic problem.

    Your credit score may be too low to qualify for a consolidation loan. If you do qualify, the interest rate on the loan is sky high and thus, no help to your cause.

    Before you give up hope and file bankruptcy, consider other options that might salvage your credit and satisfy your creditors.

    Lenders are risk adverse. To compensate for increased risk, lenders usually charge those with poorer credit rates higher interest rates. They call people in that category subprime borrowers. If you are a subprime loan applicant, the offer you get from a lender might not help much and could lead to even bigger problems if you can’t make the loan payments. It might pay to consider alternatives.

    Credit card refinancing with a balance transfer credit card is one alternative that might help you avoid subprime borrowing. You might receive solicitations in the mail for credit cards that don’t charge interest on balance for six months or a year. If you credit score is strong enough to receive such an offer, you might consider getting a new card and transferring your balances to it, giving you months without interest to work on paying off interest. In some cases, one of the cards you now have might make an offer of an interest-free period on balance transfers. Remember, if your credit is already in bad shape, you probably won’t qualify for a balance transfer or a new card account.

    Some borrowers who can’t make payments turn to peer-to-peer lending to raise money. The simplest form is to ask friends or relatives for a loan. This can be a great solution because you likely will get agreeable interest and repayment period. However, it also can cause great damage to a relationship if you fail to make on-time payments.

    If that doesn’t work, you can try online lending platforms that connect borrowers with potential lenders. Credit score usually is a factor in setting the interest rate, but online lenders can be more be more forgiving than banks. If your creditworthiness is degraded, this might be one of the few options to borrow money to repay debt.

    Fortune teller with debt consolidation loan alternatives

    Home Equity

    Homeowners are often tempted to borrow against the equity in their property, but this is a risky strategy for those trying to pay off consumer debt. The interest rate on a second mortgage, also call a home equity loan or line of credit, can be lower than on a personal loan, but the potential downside is huge. Money you owe on your credit card is called unsecured, meaning a lender doesn’t have access to collateral that it can seize and sell to settle your debt. But if you borrow money against the equity in your home in order to pay off your credit card or other consumer debt, and miss payments, your property can be taken in foreclosure.

    If you still want to use your home equity, there are several options.

    Home Equity Line of Credit

    Commonly know by the acronym HELOC, home equity lines of credit essentially allow you to use your home equity like a credit card. After evaluating your creditworthiness and the amount of equity you have in you home, a lender will offer you a credit line secured by you dwelling. Often you have a fixed amount of time – 10 years is typical – during which you can take draws on your credit line and pay interest. After that, for up to 20 years, the credit line is closed and you pay back both principal and interest. Failing to adhere to the payment terms can result in foreclosure.

    Home Equity Loan

    Like a HELOC, but you borrow against your equity in your home and receive it in a lump sum. If your home is worth $300,000 and your equity in it is $100,000, the lender might approve a home equity loan for a portion of your equity (usually 70%-80%). Again, your home is collateral and can be taken from you if you don’t make timely payments.

    Cash Out Refinance

    This option allows you to refinance your mortgage and take some of the equity in cash. For instance, if you owe $80,000 on a home worth $300,000, you have $240,000 in equity. You might consider refinancing the loan, especially if interest rates are lower than what you’re paying on your current mortgage, allowing you to take a portion of the $240,000 in cash and adding it to the refinanced loan. You might take a new mortgage for $200,000, freeing $120,000 in cash that you can use as you wish.

    Credit Counseling Programs

    Discussing your situation with a nonprofit credit counseling firm is a very good idea before deciding to consolidate your credit card debt. A certified credit counselor will help you evaluate your indebtedness and recommend the best way to deal with it. The counselor will review what you owe, discuss how you might budget better and prioritize debts. Then the counselor might suggest a debt management plan, debt consolidation, debt settlement or, if no other solution seems possible, bankruptcy.

    Debt Settlement

    Creditors might agree to reduce your debt balance if you can demonstrate you will be able to repay a smaller amount in a lump sum. To settle a debt, you usually need a third-party company to make the arrangements for you and collect your payments, which are then amassed in a lump sum to repay the creditors.

    Credit card issuers might be reluctant to accept an arrangement, especially if you try to strike a deal yourself. After all, they want to recoup as much of what they lent as possible and will try to get you to pay with intimidating phone calls and collection letters. But they generally only pursue those tactics for a limited amount of time (usually, six months) before they sell you debt to a collection company for pennies on the dollar. If the card company can make more money settling with you, it might agree to a reduced payment.

    Debt settlement might work well if you can’t arrange a consolidation plan, but there are downsides. The three large credit-rating bureaus that assign consumers credit scores will consider the amount you don’t repay a demerit and will lower your credit score anywhere from 75 to 100 points.

    The alternative – not making at least minimum monthly payments – will also have a seriously negative impact on your credit score. A certified credit counselor should help you weigh the alternatives.


    Think of bankruptcy as the point in a poker game when it becomes obvious that you don’t have the cards to win under any circumstances and you fold. Bankruptcy is the point when all other options, like debt consolidation, debt management and debt settlement, don’t offer a path to solvency. Filing for bankruptcy puts your finances in the hands of a bankruptcy trustee. It can either eliminate your debts after you’ve liquidated your remaining eligible assets or can create a reorganization plan that allows you repay part of what you owe.

    Liquidation bankruptcy, known as Chapter 7, gives the bankruptcy trustee authority to sell your assets to cover as much debt as possible. The creditors must accept the proceeds as final payment. Some assets are protected under state exemptions. These might include your home, car, furniture, clothing and retirement accounts.

    Chapter 13 is the other avenue for individuals entering bankruptcy. It allows the debtor to create a three- to five-year repayment that might not cover all that is owed but is, in the court’s assessment, sufficient to wipe away debt. Chapter 13 might be your only option if your income exceeds certain limits. It allows you to keep certain assets, including your home if you own one.

    Both chapters severely damage your credit rating and will limit your ability in the future to buy things on credit, including homes and cars, for seven to 10 years. A bankruptcy judge will review your filing and decide if your situation merits a bankruptcy filing.

    Consolidating Debt with a Debt Management Plan

    Nonprofit credit counselors can help you create a debt management plan that will allow you to repay various creditors with a single, lower monthly payment at a reduced interest rate. Perhaps just as important: Credit score isn’t a factor in qualifying for the program.

    The counselors contact your creditors and devise a plan to pay off the debt in 3-5 years. You send a monthly payment to the credit counseling agency, which then transfers it to the card companies in an agreed upon amount. The nonprofit counseling agency also works with the creditors to set an interest rate during the repayment period that should be considerably less than you were paying before entering the management plan.

    It’s important to find a reputable debt management company. Scam artists abound in the debt management field and can make your situation worse. Always deal with a nonprofit management company, especially those accredited by the National Federation for Credit Counseling (NFCC).

    Avoid companies that guarantee approval and asks for money before contacting your creditors. If you have questions about reputable firms, consider contacting your local state attorney office or the U.S. Bankruptcy Court for a list of referrals.

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    Staff Writer

    Max Fay is an entrepreneurial Millennial whose thoughtful writing shows he has a keen eye on both. Max has a genetic predisposition to being tight with his money and free with financial advice. At 25, he not only knows what an “emergency fund” is, he already has one. He wrote high school and college sports for every major newspaper in Florida while working his way through Florida State University. That experience was motivation to find another way to succeed financially and he has at Max can be reached at


    1. Brewster, M. (2019, April 13). Home Equity and HELOC for Debt Consolidation: Is It a Bad Idea? Retrieved from:
    2. NA, (2018, January 8) What is Debt Management. Retrieved from:
    3. NA, ND. 7 Alternatives to Debt Consolidation for Bad Credit. Retrieved from:
    4. Lewis, H. (2018, March 19) Cash-Out Refinance: When Is It a Good Option? Retrieved from:
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