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. Credit card debt drags down your credit score and with it, your ability to buy a home or car, rent an apartment or, sometimes, even qualify for a job.
If your credit score is tanking because you can’t pay your bills on time, it’s time to take action and look at debt consolidation.
Debt consolidation means to combine all unsecured debts (typically, credit card bills) into one pile so you make one payment a month, at a lower interest rate.
Qualifying for a debt consolidation loan with bad credit is a challenge. Many lenders won’t deal with people who have bad credit. That may not make a lot of sense, because you wouldn’t need a consolidation loan if you didn’t have a credit problem. But lenders want customers who will pay them back on time. If you have not been responsible repaying previous loans, credit cards and other debt, it is not a risk they are inclined to take.
Even if you manage to get a loan, consolidation lenders will want assurances that you will repay them. They’ll check your employment history, possibly 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 with bad credit is the right debt-relief option for you.
Where to Get a Consolidation Loan with Bad Credit
Some consolidation loans are better than others, and some you should avoid altogether. Mainstream lenders are the best place to start, but they probably are the pickiest about qualifying.
» Learn more: How to Get Out of Debt with Bad Credit
The most likely lenders for debt consolidation are:
Banks and Credit Unions
Banks are commercial lenders who aren’t really interested in debt consolidation loans. You might be a loyal customer, but be prepared for rejection.
Credit unions are nonprofits whose customers are also their owners. They tend to be more flexible because they want to take care of their own.
Both are regulated and must comply with strict rules. For that reason, they use risk-based lending models that charge higher interest to low credit score borrowers. The lower your score, the more interest you’ll pay, and the smaller the amount of money you can borrow.
Online Debt Consolidation Lenders
These businesses will pay off your debts with a consolidation loan and you’ll make a fixed payment to them in monthly installments.
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 can be very high – 25%-35% – so think hard before jumping in on this one.
Put these in the “lenders to avoid” column. Payday lenders make short-term loans at exceedingly high interest rates of 399% APR. Compare that to the 25%-30% you pay on your credit cards and the 10%-18% you pay on a debt consolidation loan. Their high interest rates can quickly result in you owing far more than you borrowed, which is the opposite of what you want.
Debt Consolidation Lenders & Rates
There are numerous choices for debt consolidation loans so be careful as you research each one. Average debt consolidation loan rates vary but are mostly based on your credit score.
|Lender||Interest Rate||Max. Loan||Min. Credit Score|
Ways to Get a Debt Consolidation Loan with Bad Credit
Straighten out your credit report (they’re could be errors) and know what your credit score is before you apply for a consolidation loan. Improving those two areas would be the first step toward getting a debt consolidation loan.
Other ways to make yourself more attractive for borrowing include:
- Improve your credit score by paying your bills on time.
- Keep the amount you spend with credit card under 30% of the limit.
- Don’t sign up for new credit cards.
- Work on your debt-to-income ratio. This is a lightly-publicized, but heavily-influential matter with lenders. Pay off any debt you can afford.
- Look for debt consolidation loans where lenders consider factors other than credit scores, including job history, income and education.
- Have a family member or friend cosign the loan for you.
Should You Apply for a Debt Consolidation Loan?
There are a lot of things to consider when applying for a debt consolidation loan with bad credit.
- If you’re considering a secured loan, you are putting up a valuable item (such as your home or car) as collateral.
- The interest rate for someone with bad credit is going to be very high. Improve your credit first, then apply.
- Applying for a new line of credit creates a hard inquiry on your credit report and could lower your credit score.
- Some lenders offer things like direct payment to creditors, free credit score monitoring and flexibility if you experience a hardship.
- Taking out a debt consolidation loan, but then continuing to run up debt is just going to put you in a worse spot.
- How much will you save monthly, as well as long-term, by consolidating your debt?
Many lending sites have free debt calculators that help you figure out what you’re paying now and what you would pay with a certain interest rate and loan term. It may seem like a lot of busy work, but it’s work you should do.
Does a Poor Credit Score Automatically Disqualify You?
Credit scores probably are a key factor in qualifying for a debt consolidation loan. They help determine what the interest rate will be. When your credit score sinks – usually because of late payments on credit cards – borrowing money can range from difficult to impossible. Pay close attention to your credit score.
How to Apply for a Debt Consolidation Loan
If your credit score is under 660, put the credit cards away for six months and work on improving it. Also, check your credit report for errors that lower your score.
If you have a relationship with a local bank or credit union, apply there first. If not, this is a good time to start one by opening an account. Bring financial records (paycheck stubs, tax records, bank statements, etc.), a Social Security card and some form of state identification.
Be prepared to present a case as a reliable borrower. Show them a budget or proof of recent, responsible financial behavior. Don’t acquire more debt.
Debt Consolidation Alternatives
If bad credit disqualifies you from getting a loan, there are debt consolidation alternatives that can improve your standing. These options vary dramatically in cost and effectiveness so research them thoroughly before choosing one.
- Debt management programs consolidate credit card debt, reduce your interest rate and arrive at an affordable monthly payment. It’s not a loan, but you can eliminate debt in 3-to-5 years.
- Homeowners could tap into the equity in their house to obtain a home equity loan or line of credit (HELOC) that can be used to pay off consolidated debts. You are putting your home at risk of foreclosure if you can’t make payments.
- Debt settlement – asking creditors to forgive a large portion of debt in return for a lump-sum payment — sounds attractive, but there are many factors involved that make this a risky, sometimes costly alternative.
- It’s possible to borrow from your 401k retirement account, but if you are younger than 59 and a half, there is a 10% penalty and you are taxed on the amount withdrawn. This is not considered a good option.
- If you can’t get a debt consolidation loan on your own, a family member or friend with good credit may cosign the loan for you. Keep in mind that your cosigner is on the line for the debt if you don’t pay.
- You can contact a nonprofit credit counseling agency for free advice on each of the alternatives mentioned in this section. If nothing else, they can spell out the pros and cons of each option, which should help you make a more educated decision.
Managing a Debt Consolidation Loan
If you are able to consolidate your debts with a loan or some other form of debt relief program, you have taken a step in the right direction, but improving your credit score and eliminating debt is typically a 3-to-5 year journey.
You’ve already taken the most important one – looking for help – but there are a few more things you can do to improve the chances of success:
- Make a budget. The easiest way to improve your financial situation is to create an honest, affordable budget. Look at it every month to see if there isn’t one more expense you can cut … or one more source of income you can add.
- Pay on time! Pay at least the minimum on every credit card and the maximum your budget will allow. That alone will improve your score.
- If you could put your credit cards away for a month, it would be great. If you stretch that to six months, your results would be fabulous.
- Track your progress. If you have a bank loan or are in a debt-relief program, call them and verify where you stand. Success will breed success!
About The Author
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it in 2012, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering the high finance world of college and professional sports for major publications, including the Associated Press, New York Times and Sports Illustrated. His interest in sports has waned some, but he is as passionate as ever about not reaching for his wallet. Bill can be reached at [email protected].
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