Debt Consolidation for Bad Credit
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If you’re like most Americans, you probably have some debt! Whether that’s a mortgage, credit card debt, car loan, payday loans, or student loans, you may find that all of this debt has contributed to a low credit score. When my wife and I were aggressively tackling our debt, we weighed the pros and cons of debt consolidation options to see if they may allow us to raise our credit score a bit faster and lower our interest rate in the process. While a debt consolidation loan wasn’t the right move for us at that time, for many people it could be a much-needed life raft for those drowning in an ocean of high-interest debt.
For many, the benefits of debt relief go well beyond a financial weight being lifted off of your shoulders. Having bad credit can lead to circumstances in your own personal finances where you wind up paying more money than you should on loans due to high interest rates. As such, many people come up with a debt management plan in order to tackle their existing debt and boost their . This in turn winds up saving them thousands of dollars with a lower rate over the term of the loan.
Of course, if your credit score is low, not all lenders will be able to offer you the sorts of loan options you may be hoping for to help with your debt payments. Keep reading to learn more about debt consolidation loans and how to go about getting one as a borrower with bad credit.
In this article
How does debt consolidation work?
At its heart, debt consolidation is relatively straightforward. Rather than pay your credit card bill, student loans, and any other debts you may have separately, you instead take out a new personal loan to pay off all of your debts and simplify things into one monthly payment. Generally speaking, the loan terms of your new loan come with a lower interest rate, which can save you money in interest while you pay off your outstanding debts with the new loan you take out.
One thing to note about debt consolidation loans is that many lenders include origination fees when you take your loan out. This is, in some ways, similar to a balance transfer fee. For example, if a lender is charging a 2.5% origination fee, and you take out a debt consolidation loan of $10,000, you will actually be required to pay back $10,250 in addition to any interest your loan accrues based on the APR you’re given. The best debt consolidation loans have very few fees—and some have no origination fees at all!
Related: Best Debt Settlement Companies
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How to get a debt consolidation loan with a low credit score
Usually, when you’re looking to take out a loan, your credit history and debt-to-income ratio play an important role in your loan terms. That may make you think that a low credit score will be a disadvantage when it comes to debt consolidation; however, there are a fair amount of online lenders and debt settlement companies that cater specifically to borrowers with lower credit scores by having more generous minimum credit score requirements.
Of course, if you want to get the lowest interest rate possible and the best repayment terms, anything you can do to raise your credit score will go a long way. Here are a few ways to go about getting a debt consolidation loan with a low credit score:
Check your credit report
In order to have the full picture of your finances, you’ll want to pull from a website like . Pulling your report from each of the three major credit bureaus can help you get the information you need to know whether or not you meet certain minimums. When you pull your credit report, you should also make sure that all of the loans and are accurate—and report them if there’s an issue or error.
Get a co-signer
Like getting any secured loan, it can be helpful to have a co-signer whose credit history can effectively raise yours and make your application more attractive to lenders. Keep in mind that you need to have a transparent conversation about the responsibility your co-signer is signing up for, just in case things go south. If you’re working with a credit counseling agency, they may be able to assist you in moderating a conversation with your co-signer before you go through with the loan. At the very least, simply having a credit counselor on your side should give your co-signer some faith.
Lower your debt-to-income ratio
One important factor to pay attention to as you apply for a debt consolidation loan is your . The lower this number is, the higher amount you’re likely to be approved for. If you’re targeting a certain amount of money in debt consolidation, spending a few months focusing on paying down some of your debts or increasing your income could go a long way in improving your chances. Of course, this strategy is only helpful if you aren’t in a major rush to take out your loan.
Compare lenders
Once you’ve started to apply for a debt consolidation loan, it’s not a bad idea to reach out to a few different lenders. As long as you reach out at roughly the same time, you’ll be able to only have your credit dinged once for checking with multiple lenders. As a borrower, this allows you to more accurately compare terms and get the best rates possible.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
Debt consolidation companies
When it comes to taking out a debt consolidation loan, there are a few different online lenders that specifically focus on helping folks with bad credit. Additionally, some credit unions (such as Navy Federal) offer debt consolidation loans, so it’s worth looking in your area to see what sorts of personal loan options you may qualify for. Here is a quick review of three of the big players in online debt consolidation:
Lender | Minimum Credit Score | APR | Loan Amount | Fees |
Avant | 580 | 9.95% - 35.99% | $2,000-$35,000 | Administration fee up to 4.75% |
Upstart | None | 5.02% - 35.99% | $1,000-$50,000 | Origination fee |
Happy Money | 600 | 11.52% - 24.81% | $5,000 - $40,000 | Origination fee |
Avant
Avant has a fairly generous minimum credit score requirement but has a higher APR than both Upstart and Payoff. They also offer the lowest maximum loan amount of each of the three lenders outlined above; however, they are transparent about their administration fees. Both Upstart and Payoff require you to begin a loan application in order to learn more about loan origination fees.
Upstart
If you have particularly bad credit, Upstart’s lack of a minimum credit score requirement is a major benefit. They also have some of the lowest potential APR rates out there—although it’s important to remember that, generally speaking, you need a good credit score in order to get competitive rates. Upstart has the lowest loan minimum, too, at $1,000, and the highest loan maximum at $50,000. While they don’t share what their origination fee will cost you, they are one of the more versatile options on this list.
Happy Money
Happy Money is a bit more selective in regards to the minimum credit score it requires for applicants. However, it could still be a great option to consider, especially because Happy Monday has built a reputation for getting its borrowers their money quickly and efficiently.
Costs and fees
When it comes to managing costs, there are a few variables to keep in mind with debt consolidation loans. In most cases, you can expect to be looking at fees related to administration or loan origination, as well as APR or interest that will be rolled into your monthly payment. Beyond that, the length of your loan term and total loan amount can also play a role in what you wind up paying.
As an example, Upstart claims that its average loan over 5 years has an APR of 23.98%, which translates to 60 payments of $25.88 per $1,000 borrowed on a monthly basis. Their website illustrates this math with the following example: “The total cost of a $10,000 loan would be $15,526 including a $644 origination fee. APR is calculated based on 5-year rates offered in the last 1 month.”
Keep in mind that some lenders have prepayment penalties, whereas others don’t. It’s usually best to pick a lender such as Upstart so that you don’t need to worry about paying off your debt consolidation loan early, should you have the means to.
Pros and cons
Pros
- Could lower your interest. Depending on how high your interest rates currently are across your debts, getting a debt consolidation loan could serve as a refinance of sorts. If the interest rate on your debt consolidation loan is lower than the average APR across your credit card balances and other loans, it may be worth saving money through consolidation.
- Many lenders fund quickly. As long as you aren’t requesting funding over a holiday or weekend, the longest most online lenders take to fund your loan is 3-5 days. This means you can use the funds immediately without having to worry about further interest occurring.
- Speed up debt repayment. Having one monthly payment and a finish line in sight can be a great way to speed up debt repayment. Consolidating your debts into one loan provides just that.
Cons
- Extra fees can be expensive. If you aren’t careful about looking at the math, you may wind up paying more for origination fees than you’d like. Keep in mind that there are extra fees that don’t necessarily exist on your current debt repayment path that will get added should you take out a personal loan for debt consolidation.
- APRs can be quite high. On the high end, APRs on debt consolidation loans can hit 35%. That’s a lot of interest to roll into a loan, and something you should be especially wary of if you currently have bad credit and may not qualify for the lowest rate offered.
- Need to be able to manage them. Just because you’ve paid off your credit cards with a debt consolidation loan doesn’t mean that you won’t rack up debt again—while still having to pay off your new loan. Reaching out to nonprofit organizations or credit counselors who specialize in handling repayment responsibly can help you avoid falling into the same trap again.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
The bottom line
Is debt consolidation for you? In two words: it depends. A lot of whether or not a debt consolidation loan makes sense comes down to the math, which, in turn, depends on your debt-to-income ratio as well as your current credit score. The good news is that it’s possible to take out a debt consolidation loan, even if your credit is in the low 300s! The bad news is that you may pay a lot in higher interest rates and origination fees.
At its heart, debt consolidation loans are really only beneficial if the math works out. As such, it’s not a bad idea to see how boosting your debt-to-income ratio or even finding a co-signer could help you get more competitive rates, even with a low credit score. Enrolling in a credit repair program through a credit counseling agency can also be a helpful way to prevent yourself from backsliding, allowing you to truly take advantage of your debt consolidation. With the information outlined above, you’ll be well on your way towards making the right choice for you and your personal finances.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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