Debt Consolidation Loans for Bad Credit

There are several ways to consolidate debt if you have bad credit. However, the better your credit score, the better your loan options.

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What Is a Debt Consolidation Loan?

A debt consolidation loan  combines multiple high-interest debts into one loan, which is repaid at a lower interest rate. The goal with this loan is to simplify your finances by making a single monthly payment to a single source at a reduced interest rate.

A debt consolidation loan is really just another name for a personal loan.

Debt consolidation loans for bad credit can provide a streamlined way to eliminate debt, but it might not be for everyone. Consolidating credit card debt when you have bad credit is a tricky numbers game that requires patience and diligence.

Benefits of Debt Consolidation

Those who qualify could find benefits in a debt consolidation loan. Among them:

  • A much lower interest rate than you are paying on one or more credit cards.
  • Making one payment to one lender, once a month simplifies payments and budgeting.
  • A fixed payment tells you what you owe every month.

Minimum Credit Score to Consolidate Your Debt

The minimum credit score required to consolidate debt generally is 660, though to get a lender’s best interest rate, you likely will need something closer to 690.

The lower your credit score, the higher your interest rate on the loan. At a certain point, a higher interest rate reduces the logic of taking out the consolidation loan. Why take out a new loan if you’re not saving money?

Obviously, the inverse is also true. The higher the credit score, the better your chances to qualify for the loan at an attractive interest rate.

If a debt consolidation loan does not work for you – and for many it won’t — you can still consolidate debt payments and lower your interest rates with a debt management plan from a nonprofit credit counseling agency. Other avenues of consolidation include a home equity loan, a home equity line of credit (HELOC), or a personal loan from a credit union or online lender. When consolidating credit card debt, the name of the game is to get lower interest rates than what you currently pay on your credit cards. If you have poor credit, have missed payments, and just racked up a balance on a credit card that charges 30% APR, you need to explore options.

How to Get a Consolidation Loan with Bad Credit

Whether your credit is good or bad, shopping for a consolidation loan is the same.

Steps include:

  • Review your credit and credit score: Before applying, check your credit report from the three major credit bureaus – Equifax, Experian and Transunion. There are several banks and online sources that will give you a credit score, but understand that the score they provide is really just an estimate. There are 16 versions of a FICO score, but this will help you understand your position and apply to the appropriate lenders.
  • Study what lenders require: It won’t help to apply for a loan from a lender that requires a 660 credit score if yours is 600. You won’t qualify. Gain as much knowledge as you can about lenders and what they require before applying.
  • Compare loan options: Lenders have different approaches. Some may let you prequalify. Others may not have a prepayment penalty if you find good financial fortune. Again knowledge is power. Know what is offered where you apply, and study interest rates closely.
  • Apply: The final step is actually completing the application, honestly and completely. If a lender requires documents, provide them.

What might help you qualify for the debt consolidation loan? Consider these steps:

  • Seek a co-signer: A friend or relative with good credit who adds his or her name to the loan can help you qualify, and perhaps qualify for a lower interest rate than you can get alone. Just be sure to make the payments on time; the last thing anyone needs to do is take advantage of someone close to you trying to be helpful.
  • Improve your credit score: Some ways to do this include opening new credit accounts (make sure there’s no annual fee if it’s a credit card), making sure you are making all payments on time, and bringing past due accounts up-to-date . So can paying extra if you have the money, which would lower the principal on your debts.
  • Consider a secured loan: Most personal loans for debt consolidation are unsecured, meaning no collateral is offered to back the loan. Secured loans require collateral – perhaps a car or home you own. Secured loans can be easier to qualify for, and should come at lower interest rates. That’s the positive. The negative: If you default on the loan, the lender can claim the property used to secure the loan.

Where Can I Get a Debt Consolidation Loan for Bad Credit?

There are a number of good options for a consolidation loan that would allow you to pay off your cards and focus on the new loan. Make sure the one you find offers a lower interest rate than you’re paying on your credit cards, and hopefully more lenient repayment terms.

If your credit score is high enough, you might be able to get a consolidation loan from your own bank . If not, you’ll have to look for alternatives. Here are a few to research.

Local Banks and Credit Unions

A credit union may be willing to overlook a poor credit score if other aspects of your financial portfolio are up to par.

Credit unions are nonprofit financial organizations praised for their low interest rates and high-quality customer service. These are member-owned institutions that usually provide service to a local community. This means you have to join the credit union before they will finance your loan.

With fewer consumers to compete with for service, you have a much better chance of getting the guidance and advice you need. Another plus: Credit unions tend to have cheaper rates and fewer fees than traditional banks.

Another benefit to credit unions: Because you become a “part owner” when you join, the credit union may be more willing to approve a loan and help you find a lower interest rate.

It’s not unlike if you have kept your money and dealt with a local bank for enough time to develop a relationship with those that run the bank. If you have good standing and a good relationship with your bank manager, he or she could help find the best loan to fit your needs.

Online Lenders

Online lending is any kind of borrowing done without using a traditional bank. As the name implies, it is conducted online. Lenders are individuals or groups who offer to finance your consolidation loan with terms and interest rates designed to compete against traditional lenders. Popular online debt consolidation lenders include SoFI, LightStream, Marcus, Lending Club and Prosper. Online lenders require you to fill out an application and, based on your verified information, will offer you an interest rate for the loan. Acceptance isn’t guaranteed, and interest rates will vary, sometimes dramatically. If the loan application checks out and you like the terms, the service will pair you with a private lender and the loan proceeds.

Low Minimum Score Lenders

Some lenders will offer consolidation loans to those with lower minimum credit scores. A score of less than 640 typically disqualifies you from commercial bank loans, but some lenders – mostly operating online – will approve loans for borrowers with scores under 600. Keep in mind that lending is about risk and the bigger risk you are, the more interest the lender will want you to pay. The interest rate you get with a score under 600 might not be much different than you’re paying on your credit cards.

Compare Lenders

It’s not wise to rush into a loan. Taking a little extra time to do your homework and understand the details of your loan options is important, and might save money.

steps Here are suggestions to follow when considering a debt consolidation loan if you have bad credit:

  • Shop around: Consider more than one loan. Shop options. This should be done any time you seek a loan or financing. Understanding what a difference 1% or even half a percent in interest means over time is important. Some lenders may prequalify loans with a soft credit inquiry, which means you will not risk damaging your credit score by shopping.
  • Know the details: Yes it’s important to know the interest rates, but sometimes lenders will tease you into accepting a lower interest while adding extra fees that may make their loan more costly. Read the fine print to understand fees and costs. If you don’t understand that information, ask a friend who is knowledgeable about finances to help.
  • Calculate what it means: Don’t take the lender’s word that the loan will save money. Do the calculations yourself. Online loan calculators are available that will tell you what your present loans cost and what the potential loan will cost. Do the math to be sure you are actually saving. InCharge Debt Solutions offers a debt consolidation calculator that can help.

Popular Debt Consolidation Lenders

A quick glance at the top five lenders for debt consolidation loans shows the challenge in qualifying and the high interest rates if you have a bad credit score. Lenders generally want a credit score of 660 or above, and will increase the interest rate to nearly 40% if you have a poor credit score. These numbers (as of September 2022) show the importance of shopping and doing the math on the possible loan.

LenderInterest rateMaximum loanMinimum credit score


Watch Out for Predatory Lenders

A payday loan is one option for borrowing money, but it’s not a wise one because it is a high risk, and  extremely expensive method. Payday loans also are home base for predatory lending. The interest rates of $15 on every $100 loaned, works out to 399% APR, as opposed to the 25%-35% charged on high-interest credit cards. Also, if you can’t repay the loan in the typical period of two weeks, you could get talked into “rolling over” the loan for another two weeks, which means more interest and fees for a loan you already can’t afford to repay. In short, using payday loans to try and get out of debt actually puts you deeper in debt.

How Lenders Evaluate You

A consumer’s credit score is the most talked about factor when applying for a loan, but it is not the only one. The little known subject of debt-to-income ratio is also a huge factor in the approval process.

Debt-to-income ratio is a measure of the percentage of your gross monthly income that is used to make monthly debt payments. It is a favorite tool for lenders in evaluating a consumer who is looking for a loan.

To calculate your debt-to-income ratio add up all your monthly debt payments and divide that number by your gross monthly income. For example, let’s say you are paying $1,300 a month for your mortgage, $400 a month for a car and $500 a month in other debts, you have $2,200 in debt payments.

If your monthly pre-tax income is $5,000, your debt-to-income ratio would be 44% (monthly debt of $2,200 divided by gross income of $5,000 = 44%). That would be a problem for lenders, who typically get skittish when the debt-to-income number climbs above 35%.

In this example, you could lower your DTI by reducing (or paying off) your car payment and the amount spent on other debts. Getting the number under 35% would help make lenders look more favorably on your loan application and offer you better interest rates and terms.

How Your Credit Score Impacts Your Interest Rates

 Lenders offer different interest rates based on the risk that the borrower may not repay the loan. It’s known as “risk-based pricing,” and the bottom line is simple: The lower the risk, the lower the interest rate.

Sometimes the “risk” is too great to qualify for a consolidation loan. For example, Prosper, an online lending company, requires a credit score of 640 or higher. Lending Tree, another online source requires a 600 or higher.

The average FICO credit score is at an all-time high of 716 in 2022, but 15.2% of consumers have scores lower than 600 and may be turned down for a consolidation loan.

It’s a catch-22 for people with low credit scores, but there are alternatives, specifically a debt management program.

Improve Your Credit Score

Improving credit scores isn’t just a national trend these days, it’s a national passion. Credit scores have gone up 10 points in just three years, one of which included the pandemic. How can you help improve your credit score?

  • Pay bills on time: You could see an improvement in six months if this was the only step you take.
  • Pay down the balance on all credit cards: Make some sort of payment – even just the minimum – on every card you own, every month. Lower balances lead to higher scores.
  • Don’t ask for any more credit cards: Seeking more credit when you’re already far behind is a huge negative.
  • Check your credit report: There may be reporting errors that cost you. More than one third of consumers found at least one error on their credit report. You get one free every year from each of the three reporting agencies. Take advantage of it and see if it helps improve your score.

Managing a Debt Consolidation Loan

If a debt consolidation loan is for you, it’s important to manage it prudently and well once you sign the papers. Not repaying the loan in full and on time will only cause more debt problems in the future.

Here’s a few rules to follow with your debt consolidation loan

  • Pay your debts immediately: Once you qualify for a consolidation loan, you will receive the funds in a lump sum. Do not use them to go to Bermuda. Instead, pay off all lingering debts that caused you to seek the loan in the first place. Eliminate those debts right away.
  • Follow a budget: Sit down and calculate what you bring in in income compared to what you spend. Include mortgage, groceries, gas for the car and household bills along with the debt for your loan. It’s important to budget your monthly expenses so you know you are not overspending.
  • Use automatic payments: Most lenders approve autopay, so use it. It ensures payments are made in full and on time. And it takes the worry off your mind about remembering the date and getting the payment sent in time. Some lenders will even cut .025 off your interest rate if you pay automatically. Technology is your friend. Use it.
  • Be honest with yourself about your spending: If you are spending $300 a month going out to dinner, or $200 a month for cable channels you don’t watch, it’s time to assess and adjust. Cut back where you can, and then take this important step: Stop using the credit cards except for emergencies. Discipline wins the day.

Debt Consolidation Loan Alternatives: Other Debt Relief Options

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: A debt management program can 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.
  • Home equity line of credit: 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.
  • Home equity loan: A home equity loan also taps into the equity you have in your home. These loans used to be called second mortgages, and allow a homeowner to borrow against the equity (value less mortgage balance). Using a home equity loan to consolidate debt is only available to those who have sufficient equity in their home.
  • Debt settlement: With debt settlement you ask 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.
  • Credit card debt forgiveness: This is a new program offered by just a few nonprofit credit counseling agencies, including InCharge Debt Solutions. There is no negotiating in nonprofit debt settlement. The lenders agree upfront how much they will accept to settle the debt – usually 50%-60% of the amount owed – and divide that amount by 36. If the consumer makes 35 fixed payments on time, the account is settled.
  • 401(k) loan: 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 if you do not repay in full what you took out. This is not considered a good option.
  • Borrow from friends or family: 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. Do not aggravate Aunt Gladys.
  • Credit counseling: This is done through a nonprofit agency that can provide insight into 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.
  • Bankruptcy: Bankruptcy is a last resort, but a necessary one for some. This court-approved process has the goal of eliminating debt, but it can hurt your credit rating and stay on your credit report for 7-10 years. Chapter 7 bankruptcy is most typical and involves selling assets (but not your home or assets required to live and work) to pay off debt. Chapter 13 bankruptcy involves a court-approved payment plan to pay off debt over 3-5 years.

Get Started with a Free Credit Counseling Session

Sound and professional advice is the best place to start when considering whether a debt consolidation loan makes sense for you. Credit counseling can provide that advice.

A nonprofit agency like InCharge Debt Solutions offers free credit counseling to those seeking debt help. Nonprofits are certified by the National Foundation for Credit Counseling, and by law must offer the best financial advice.

A credit counselor can review your debts, budgets and offer advice on money management and debt management. The counselor will develop a plan that best fits your circumstances. Discussions typically last 45 minutes to one hour, and can be done on the phone or online.

In the maze of financial advice possibilities, InCharge Debt Solutions is an excellent place to start. Its credit counseling helps you get your feet on the ground while determining the best ways to fix your debt challenges.

About The Author

Pat McManamon

Pat McManamon has been a journalist for more than 25 years. His experience has mainly been in sports, but the world of athletics requires knowledge of business and economics. He also can balance a checkbook and keep track of investments with Quicken quite adeptly. McManamon’s experience includes covering the NFL for ESPN, LeBron James for the Akron Beacon Journal and AOL Fanhouse, and the Florida Gators and Miami Hurricanes for the Palm Beach Post.


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