Debt Consolidation Loans for Bad Credit

    Getting a debt consolidation loan when you have bad credit can be difficult. Learn about debt consolidation loans & other options to get you out of debt.

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    Good credit is a valuable asset and a point of pride, but bad credit is an affliction that eats away at those who have it. It is a millstone, dragging down your ability to buy a car, rent an apartment or buy a home.

    If your credit score is tanking because you can’t pay your bills on time, it’s time to take action. But qualifying for a debt consolidation loan with bad credit can be a challenge.

    With a debt consolidation loan, you pay off all your credit card bills at once and repay the loan at what should be a considerable savings. That is because the interest rate on a debt consolidation loan should be much lower than what you pay on a credit card.

    Plus, you simplify the bill-paying process by making just one payment for one debt instead of multiple payments for multiple debts.

    Man with bad credit signing debt consolidation loan documents

    A Poor Credit Score Can Disqualify You

    Credit scores are a key factor in qualifying for a debt consolidation loan because they are a huge factor in determining the interest rate you pay on the loan. When your credit score sinks – usually because of late payments on debts, especially credit cards – borrowing money can range from difficult to impossible.

    The nation’s three largest credit reporting agencies (Experian, TransUnion and Equifax), keep records on anyone who has borrowed money or signed up for a credit card. If you pay your bills late, consistently use more than 30% of your credit limit or carry big balances from month-to-month, the credit agencies report it and your credit score plunges.

    Lenders love borrowers who pay their debts on time. Unfortunately, if you fail to make your payments, the love vanishes. They might call you with a warning, but they will report your delinquency to the credit bureaus, making it harder and more expensive for you to borrow.

    What do you do? If you are struggling to pay your bills, the best idea is to cut back on spending and redirect money to your credit-card, student loan or consumer debt payments. If you can’t do that, it’s time to consider a debt consolidation loan. But if your credit disqualifies you, look for alternatives to a debt consolidation loan like contacting a nonprofit credit counseling agency for free advice, asking about debt management programs and debt settlement, or, if it’s an extreme case, bankruptcy. Make sure the agency has trained and certified counselors offering advice.

    High Interest Rates Are Costly

    Failing to tackle your debt can mean you’ll spend much more money on interest the next time you borrow. A lot more money.

    An excellent credit score (above 720) in March of 2018 would get you a 15% interest rate on your credit card. A good score (640-720) would mean 16% interest while a bad score (under 640) would mean paying interest of 19.7% or more for your credit card.

    The dollar difference between them on an annual basis?

    If you owed $1,000 on a credit card with 15% APR, you’d pay $161. If your interest rate was 16%, you’d pay $173 of interest. If your interest rate was 19.7%, you’d pay $217. That’s a $56 saving if you had an excellent credit score.

    The credit bureaus rank borrowers by numbers ranging from 300 to 850. For those near the top (scores above 720), borrowing money and getting credit cards with relatively low interest rates is easy. Banks always are sending offers to those with excellent credit, hoping to lure them to take a new credit card.

    If you’re on the other end of the scale, don’t expect many offers. In fact, most banks would prefer you not apply. Those that might consider your application will want to charge a high interest rate to compensate for what they view as a high-risk customer. Even with the eye-popping interest, they are unlikely to allow you to borrow much, capping what they call your credit line at a low figure.

    For a sterling borrower, one with a credit score between 720 and 850, getting a personal loan is not so hard to find and lenders might offer an affordable annual interest rate from 10.3% to 12.5%, which is less than the preferred-customer APR on most credit cards. But it gets harder and more expensive the worse your score becomes.

    If you fall in the bad range – below 630 – the APR for both personal loans and credit cards can soar above 28% and that’s if you can get a loan at all. For someone already struggling with money, it probably won’t work.

    What Is Debt Consolidation?

    Debt consolidation is combining all of your unsecured debt payments into one payment, usually with a lower interest rate. There are two ways to consolidate your debt: with a loan (known as a debt consolidation loan) or without a loan (nonprofit debt management).

    What’s a debt consolidation loan? It’s a way of paying off your debt with an umbrella loan that you acquire from a local bank, credit union, online lender or a friend or family member.

    It is important to note that the only way a debt consolidation loan makes sense is if it reduces the interest rate and monthly payment you are making on the five credit cards used in our example.

    The problem is many lenders won’t make consolidation loans to people with bad credit. That might sound unfair because you wouldn’t want a consolidation loan if you didn’t have a credit problem.

    But try to think about your situation from the lender’s perspective. They want customers who will pay them back every month. If you have not been responsible in repaying previous loans, they are taking a risk giving you another one.

    You can address that problem by waiting six months to apply for a debt consolidation loan and using that time to clean up your credit report and improve your credit score. Things like making on-time payments – even just the minimum every month! – and keeping your credit card purchases under 30% of your credit limit will go a long way toward making you a more attractive prospect for borrowing.

    Even if you manage to get a loan, consolidation lenders will want assurances that you will repay them. They’ll check your employment history, ask for collateral and demand high-interest payments to offset the risk. If that happens, you might want to reconsider whether a debt consolidation loan is the right debt-relief option for you.

    Where to Get a Consolidation Loan with Bad Credit

    If you decide to pursue a debt consolidation loan, you should consider the options carefully. Some are better than others, and some you should avoid altogether. Mainstream lenders are the best place to start, but they probably are the pickiest to get a loan from.

    Here are the most likely lenders:

    • Banks and Credit Unions.  They really aren’t interested in consolidation lending. Though they are good places to start, you should be prepared for rejection. Banks are commercial lenders and credit unions are nonprofits that usually focus on small communities of people. Both are regulated and must comply with strict rules in deciding to whom they’ll lend money. For that reason, they use risk-based lending models that charge higher interest to risky borrowers. The lower your credit score, the more interest you’ll pay, and the smaller the amount you will be allowed to borrow.
    • Payday Lenders. Put these in the “Lenders to Avoid” column. Typically, they make short-term loans at exceedingly high interest rates, often as much as 399% APR. They prey on people with bad credit who want to consolidate their debts. Their high interest rates can quickly result in you owing far more than you borrowed, which is the opposite of what you want.
    • Online Debt Consolidation Lenders. These businesses will pay off your debts, consolidating what you owe into a single payment which you repay, usually on a monthly basis. Like banks, online debt consolidation lenders typically use a risk model to decide whether to accept you as a customer and how much interest to charge. Usually, they’ll offer several options for consolidating with a bad credit history. The loan amounts vary from $1,000 to as much as $50,000 with repayment terms of 3-5 years. The interest rates typically are very high – 25%-35% -- for people with bad credit.

    Homeowners can use another variety of bank loan to repay debt, one that uses equity in a home as collateral for either a lump-sum loan or a line of credit. There are called home equity loans or home equity lines of credit (HELOCs). Though this is a tempting, straight forward way to raise money for paying down debt, it puts your home at risk since the real estate becomes collateral against default. Lenders also consider your credit score, monthly income and other factors when deciding how much money you can borrow against your home and what interest rate you’ll pay.

    Alternatives to Debt Consolidation Loans

    Not every debt relief solution involves a consolidation loan. An assortment of nonprofit debt counseling and debt management companies are available to help you evaluate your debt load and devise a plan for paying it off.

    Unless your debt level is so high that bankruptcy is the only viable alternative, call a nonprofit credit counselor for advice and options including debt consolidation without a loan. They usually work with your creditors on a debt management plan that reduces interest rates on your credit cards and other consumer debt.

    The plan involves combining various consumer debts into a single payment to the consolidation company, which will distribute the money to the lenders according the terms of an agreed upon debt management plan. There is a monthly service fee involved, which should be considered.

    You can contact your credit card issuers to try to negotiate a plan yourself, but often the cost of a debt management plan with a nonprofit is reasonable and the counselors are experienced in working with lenders.

    Whether you arrange a plan yourself or you use nonprofit debt relief, the plan will be reported to the credit-rating agencies and likely will affect you credit score. Your credit score will drop for the first few months of the debt management plan because you are asked to get rid of all, but one credit card that card can only be used for emergency situations. Your score will go back up soon enough, however, because you will be making on-time payments every month.

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    Staff Writer

    Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at


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