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Managing multiple debts can get overwhelming quickly—you might be juggling credit card debt, medical bills, auto loans and student debt all at once. Coupled with a low credit score, it’s a stressful scenario that can leave you feeling hopeless. And unfortunately, your bad credit score can make it difficult to qualify for a lower interest loan, such as a debt consolidation loan, that may help you pay off your debt sooner.
If you’re wondering how to get a debt consolidation loan with bad credit, it’s still possible to get approved. There are lenders who specialize specifically in providing debt consolidation loans for poor credit carriers—you’ll just need to do some research and shop around until you find the right solution for your situation.
What is a debt consolidation loan?
A debt consolidation loan is an unsecured personal loan designed to simplify the debt repayment process. By combining multiple balances into a single fixed-rate loan, it can potentially allow you to secure a lower interest rate on your debts and may enable you to pay them down faster.
Benefits of debt consolidation loans
Debt consolidation means combining multiple debts into a single loan with one fixed monthly payment. This type of personal loan will ideally allow you to combine several high-interest debts into a new loan with a lower interest rate. If managed properly, it can yield significant money-saving benefits.
Simplify your finances
One perk of a debt consolidation loan is that it allows you to streamline your finances and more easily manage your debt. Instead of keeping track of multiple debts—all with different monthly due dates and payment amounts—consolidating them means you only have to keep track of a single payment each month.
Lower your interest rates
The main allure of a debt consolidation loan is the potential to secure a total lower interest rate on the debts you’re currently paying off. For example, if your current interest rate is between 17 and 20 percent and you can get a debt consolidation loan with a 14 or 15 percent interest rate, you’ll save money by consolidating.
Improve your credit score
Depending on the terms of your debt consolidation loan, it could help you raise your credit score if it allows you to pay off your debt in a shorter amount of time. That’s because lowering the amount of debt you owe improves your credit utilization ratio, which accounts for 30 percent of your credit score.
Another factor that determines your credit score is your payment history. Lenders want to see that you have a history of consistently paying your balances on time every month, which can be tricky if you’re managing multiple debts. It’s easier to let things slip through the cracks when you’re juggling different due dates and payment totals.
Since a debt consolidation loan streamlines your debt into a single monthly payment, it makes it easier to sustain a positive track record of paying your balance each month, which gives a boost to your overall credit score.
What credit score do I need to qualify for a debt consolidation loan?
There are various credit-scoring models that each have different ranges for what’s considered a good credit score. The most widely used credit scoring model is the FICO score, and scores below 579 are typically considered poor. If your score is below 579, it will be more difficult to secure a debt consolidation loan. However, your credit score is just one of a few factors lenders consider when determining approval for a debt consolidation loan.
How to get a debt consolidation loan with bad credit
If you’re struggling with your debt and think a debt consolidation loan could help, it helps to approach the process with a plan. It’s important to do your research before applying in order to ensure you find the right loan for your situation and maximize your chances of approval.
1. Check your credit score
In order to find a loan that best fits your needs, you need to know your credit score. This will help you narrow down your options to loans you know you can qualify for and identify ones to rule out if you don’t meet the credit score requirements.
You’re entitled to one free credit report from each bureau (Equifax, Experian and TransUnion) per year, which you can obtain on the official AnnualCreditReport.com website. Request a copy and review it to see exactly where it stands before you apply for a debt consolidation loan.
While you’re at it, you should also review your credit report for any mistakes that could be hurting your score without you realizing it. That could include accounts listed that don’t belong to you or that you never opened, incorrectly reported missed payments or any other misinformation that could be dragging down your score.
If you do find any errors, take action to remedy them—it might result in a boost to your credit score, which will improve your chances of qualifying for a debt consolidation loan with better terms.
2. Shop around and compare your options
You don’t want to jump on the first loan offer you see without weighing your other options. Every loan comes with different fees, interest rates and repayment amounts that you should consider carefully to ensure you’re getting the best possible deal.
In order to determine whether different loan offerings are the right fit for you, you should first crunch your current numbers so you know what you’re working with. Calculate how much you’ll pay in total for all your debts without a consolidation loan, including monthly payments and total interest costs. Then you can compare different loan offerings to your current number.
When examining different loan offerings, take a look at the total loan amount including the interest rate. Figure out how much you’ll owe in monthly interest payments and what you’ll end up paying for the entire lifetime of the loan. If it comes out lower than what you’re currently paying, it’s probably a safe bet.
While there are many sources for obtaining a consolidation loan, a good starting point for comparison shopping could be online lenders—they usually allow you to view their rates with just a soft credit check (which won’t do damage to your credit score). Additional sources to look into include your current bank, smaller local banks and credit unions.
3. Consider a cosigner
A cosigner is when someone else cosigns to be added to a borrowed loan. If you have a family or friend with good credit who’s willing to become a cosigner, it could boost your chances of being qualified for a debt consolidation loan with potentially better terms. Even if your credit score meets a lender’s minimum requirements to qualify for approval, adding a cosigner with a higher credit score could help you secure lower interest rates.
Keep in mind that the cosigner shares equal responsibility for the loan, so both of your credit scores are impacted as you carry out the terms of the loan.
Where to find debt consolidation loans for poor credit
There are many sources and lenders available for obtaining a loan, and it can be difficult to figure out where to start your search. Here are some guidelines you can start with to help you find the right debt consolidation loan offerings.
Credit unions
Local credit unions or small banks are great places to start because they often offer more flexibility for those with poor credit. They also have loan officers available for you to speak with, which can be helpful in determining what you qualify for and learning the details of different loan rates and terms.
Keep in mind that credit unions will still check your credit if you decide to apply for a loan, which can negatively impact your credit score. You’ll also need to become a member with them if you aren’t already in order to take advantage of their services. Here are some popular credit union lenders to consider:
- First Tech Federal Credit Union provides personal loans for debt consolidation between $500 and $50,000 with no minimum credit score and no origination fees. The Annual Percentage Rate (APR) is between 6.70 percent and 18 percent, making it a great low-rate option.
- Navy Federal Credit Union also provides debt consolidation loans of up to $50,000 with no minimum credit score and no origination fees. The APR is between 7.49 percent and 18 percent.
Online lenders
Online lenders offer the benefit of convenience, since you can usually complete the entire process from start to finish online. They’re also a good place to look if you have bad credit because they’re often more likely to approve you for a debt consolidation loan than a traditional bank.
Another key perk of going through online lenders is that you can usually compare loan rates and terms without impacting your credit score, unlike credit unions. However, the drawback is that debt consolidation loans for bad credit carriers usually come with high interest rates and premiums when provided through an online lender. You also have to be wary about extra fees, such as origination fees, that cover the cost of processing your loan. Here are some potential online lenders to consider:
- Upstart offers debt consolidation loans between $1,000 and $50,000 for borrowers with a minimum credit score of 580. APR varies by state, but the average APR range is between 7.98 percent and 35.99 percent.
- Avant offers debt consolidation loans between $2,000 and $35,000 for borrowers with a minimum credit score of 550—although it’s worth noting that most approved borrowers have credit scores between 600 and 700. The APR for loans financed through Avant falls between 9.95 percent and 35.99 percent.
- OneMain Financial doesn’t specify a required minimum credit score for borrowers, but the average credit score of those approved is between 600 and 650. They offer debt consolidation loans between $1,500 and $20,000 with an average APR between 18 percent and 35.99 percent—a notably higher APR than other online lender options. However, they’re very flexible when it comes to approving those with low credit scores.
Alternatives to a debt consolidation loan
A debt consolidation loan can be a great way to simplify your debt management, but if you can’t qualify for a loan with a lower interest rate than what you’re already paying, there’s nothing to gain by taking one out. After all, you don’t want to end up in more debt than you’re already in. If this is the case, look into some alternative options instead.
Debt management plan
A debt management plan (DMP) may help you pay off your debt sooner with lower interest rates through a fixed payment plan, and can be found through the National Foundation for Credit Counseling (NFCC)—a nonprofit organization that offers free credit counseling services. Even if you choose not to enter into a DMP, you can benefit from other services provided, such as free budgeting help, a review of your credit reports and general advice on how to best tackle your unique financial situation. You can reach out to an NFCC counselor by phone at 800-388-2227.
Home equity loan
If you’re a homeowner and have equity in your home, you may be able to get a home equity loan as a means to consolidate your debt. The idea of taking out a home equity loan over a debt consolidation loan is that it might help you score a lower interest rate. However, approach this option with caution—while it could help you qualify for better financing terms and lower interest rates, it requires you to borrow against the value of your home and risk losing it if you can’t repay the loan. You should only pursue this option if you’re sure that you won’t have any trouble making all of your payments on time for the entire lifetime of the loan.
Reach out to your current lenders
If you want to tackle your debt without involving any new loans or third parties, there’s always the option of contacting your lender or credit card company directly to see if they might be open to working something out. You can try negotiating different terms like reducing your monthly minimum payment, lowering your interest rate or settling on past late fees. While not all lenders will be open to negotiating with you, some certainly are if it means more assurance that you’ll pay back the money you owe.
Debt settlement
A debt settlement involves hiring out a company to negotiate with your creditor on your behalf in the hopes of arriving at a settlement that resolves your debt for less than what you currently owe. This option often requires a significant amount of money up front to deposit into your settlement account, and you might even end up owing more than when you started due to any associated fees. Generally, this isn’t the best path to consider unless you’re out of options aside from bankruptcy.
Bankruptcy
If you’re in over your head with debt that will take five years or more to repay (even after a consolidation loan), filing for bankruptcy protection might be your final option. Bankruptcy remains on your credit report for seven to 10 years, and you should expect your credit score to take a significant hit once you file. However, it does offer the chance to rebuild your finances and credit if you proceed with diligence and keep that goal front and center moving forward. Your credit will eventually recover.
Dealing with your debt might seem intimidating, but it’s important to remember that there are resources available to help you stay on top of it. Whether that’s a debt consolidation loan, credit counseling services or simply a budget overhaul, what matters most is that you have a plan for becoming debt-free.
Keep in mind that if you’re able to refinance your current debt and secure a lower interest rate than you’re currently paying, a debt consolidation loan could be a good option for you—even if you have bad credit. Be sure to explore your options and do your research to ensure you find the best possible rate for your situation.
If you’re wondering where your credit score stands and need help determining whether your credit report contains errors that could be negatively impacting your score, the consultants at Lexington Law can work through the process with you.
Reviewed by John Heath, Directing Attorney of Lexington Law Firm. Written by Lexington Law.
Born and raised in Salt Lake City, John Heath earned his BA from the University of Utah and his Juris Doctor from Ohio Northern University. John has been the Directing Attorney of Lexington Law Firm since 2004. The firm focuses primarily on consumer credit report repair, but also practices family law, criminal law, general consumer litigation and collection defense on behalf of consumer debtors. John is admitted to practice law in Utah, Colorado, Washington D. C., Georgia, Texas and New York.
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