Debt Consolidation Loans for Bad Credit

There are ways to consolidate debt if you have bad credit. However, your options expand in number and desirability if you improve your credit score.

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Minimum Credit Score to Consolidate Your Debt

Consolidating credit card debt when you have bad credit is a tricky numbers game that requires some patience and diligence to succeed.

If your credit score is above 650, you should qualify for a debt consolidation loan (also known as a personal loan) that would reduce the high-interest rates you pay credit card companies.

If your credit score has gone south of 650, there are still lenders willing to offer you loans to eliminate your credit card debt, but the interest rates may be so high that there is no gain.

Instead, you can still consolidate debt payments and lower your interest rates with a debt management plan from a nonprofit credit counseling agency. You may also qualify for debt relief through a home equity loan or line of credit, a credit union or online lender, all of which are described below.

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 all options.

Raising your credit score might be the best first step you can take.

The number of cards you have doesn’t matter to credit reporting bureaus nearly as much as the amount of debt you carry on those cards. The national average credit card debt for Americans carrying a balance was approximately $5,500 in 2022.

The average interest rate for credit cards in 2022 was 16.17%.  But many consumers, especially those with sub-prime and deep sub-prime credit scores, face interest rates of 30% or even higher.

Some banks, credit unions and a variety of online lending sites offer consolidation loans. As with any loan, the terms will largely depend on the applicant’s credit history. Most consumers think first of their credit score, but lenders also scrutinize your debt-to-income ratio.

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 and hopefully more lenient repayment terms.

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

Credit Union

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 a 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.

Online Lenders

This alternative is a child of the internet: online lenders! These are individuals or groups who offer to finance your consolidation loan. Popular online lenders include 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.

Consolidating Student Loans

Not all unsecured debt problems spring from credit cards. Student loan debt has soared to more than $1.8 trillion for the 46 million Americans that hold it. Unlike other unsecured debt, student loan debt isn’t dischargeable through bankruptcy, so you have just one choice: repay it.

Lenders like non-dischargeable loans and offer borrowers lower rates, but sometimes former students can’t keep up with what they owe. Many students take out multiple loans during college and grad school, and they can have different repayment terms and interest rates. Consolidating to a single, fixed-rate loan can make managing your finances much easier. Remember, federal loans can be consolidated, but private student loans are not eligible.

Peer-to-Peer Lending

There is an inherent flexibility with Peer-to-Peer lending that makes it one of the best places to go for people seeking debt relief for bad credit with a debt consolidation loan. P2P lenders choose who they want to do business with and how much risk they are willing to take. Your credit score still matters – it will dictate how high an interest rate you pay on the loan – but it does not automatically eliminate you from consideration like it would at some commercial banks and credit unions.

Get a Friend or Relative to Co-sign

You might be able to find a relative or friend to co-sign a consolidation loan. This might be a good alternative for you if your credit score disqualifies you from a bank loan, but it puts the co-signer on the hook if you default. Co-signers should be wary when they agree to this arrangement and make sure all terms and conditions are spelled out in an agreement.

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 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.

Home Equity Loan

You might also consider wrapping your debts into a secured loan like a home equity loan. As long as you have collateral that a lender can seize if you default on your loan, the lender might offer financing. Often with collateral such as a home or a car, you can get a better interest rate than on an unsecured loan for a similar amount. But remember, secured loans come with an implicit risk: If you miss payments, the lender can seize the property you used to secure the loan.

Payday Lenders

Payday lenders charge extremely high interest rates on loans that are just advances on your next paycheck. If you owe $300 on your credit card, a payday loan could give you the money right now. The downside: The interest on the payday loan will be 10-15 times higher (300%-400% APR) than the interest on the credit card. Even if the payday loan is enough to bring you current on several credit cards by effectively consolidating the debt, the new loan with the payday lender will yield worse financial consequences. Payday loans are not a good way to consolidate debt.

Compare Lenders

If you have a low credit score you may be tempted to pounce on the first offer thrown your way. However, you will save a lot more money if you go out of your way to compare the rates of at least three different lenders.

A low credit score will make you a target for predatory lenders and high-risk loans. You can stay ahead of these crooks by always comparing their rates to the industry averages. Personal loan APRs cover a broad range and often fall between 6% and 36%. If a lender wants to lock you into a rate above 36%, then you should keep shopping. The only time you should consider a rate that high is when you have exhausted all other options.

Watch Out for Predatory Lenders

If you decide that you absolutely must risk taking a payday loan, be aware that this is the home base for predatory lenders. The interest rates of $15 on every $100 loaned work 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 can put you deeper in debt.

How Lenders Evaluate You: Debt-to-Income Ratio

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 ($2,200) divided by gross income ($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 will not repay the loan. It’s known as “risk-based pricing,” and the bottom line is simple: The lower the risk, the better the price, which in this case is lower interest rates.

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 660 or higher.

The average credit score is 716 in 2022, but 16% of consumers have scores lower than 580 and likely would be turned down for a consolidation loan. Another 17% are under 670 and likely would find it difficult to get a loan that didn’t include high interest rates.

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 becoming a national passion.

Credit scores have gone up 13 points in just two years. How are people doing it?

  • Pay your 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. 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 from each of the three reporting agencies. Take advantage of it and see if it helps improve your score.

Debt Consolidation Loan Alternatives: Other Debt Relief Options

A personal loan isn’t your only way out of debt. Contact InCharge Debt Solutions to discuss your options with a trained and certified credit counselor.

Credit counselors specialize in helping consumers set up budgets and will ask questions about your income and expenses to determine what option suits you best.

Here are some of the choices you may be presented:

  • Debt management program – These are offered by nonprofit credit counseling agencies. This program reduces interest rates on credit cards to 8% (sometimes lower) and lowers your monthly payment to an affordable rate. The goal for credit counselors is to eliminate credit card debt in 3-5 years.
  • Debt settlement program – This option requires negotiating with card companies to get them to accept less than what is owed on a debt. The goal is to have the card company accept 50% of what is owed. The drawback is this will put a stain on your credit report for seven years and you could have problems getting any other type of credit during that time.
  • Credit Card Debt Forgiveness – Credit Card Debt Forgiveness 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 ahead of time how much they will accept to settle the debt – usually 50%-60% of the amount owed – and divide that number by 36. You make monthly payments for 36 months, and the account is settled.
  • Bankruptcy – If there is no way you can eliminate debt in five years or less through a repayment program, then filing for bankruptcy could be your best choice. Your options are chapter 7 (dischargeable debt) or Chapter 13 (repayment plan), but both leave damaging marks on your credit report. Before doing anything, contact an attorney who specializes in bankruptcy filings.

Bankruptcy always should be the court of last resort. If you have poor credit and are in an ocean of debt, a consolidation process is often the best way to keep from drowning.

About The Author

Joey Johnston

Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.


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