How to Get a Debt Consolidation Loan With Bad Credit

Woman researching at computer how to get a debt consolidation loan with bad credit.
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Do you have credit card debt?

I did.

That was until I realized I could consolidate my debt into one loan.

When I got my first credit card, I maxed it out within weeks. Dumb, I know. After realizing what I did, I felt like I was in a hole I couldn’t climb out of. 

Fortunately, I learned about debt consolidation.

So if you’re like the average American with $5,525 in debt, don’t worry!

Keep reading to learn about debt consolidation loans bad credit and you too can climb out of debt!

What is a Debt Consolidation Loan? 

Debt consolidation is when you combine two or more credit card balances (or loan amounts) into a single loan. This way, you only pay one monthly payment and only have one interest rate. 

Debt consolidation is most helpful when you have several high-interest credit card balances and want to roll them all into one loan with a potentially lower interest rate. 

Benefits of Debt Consolidation Loans

You might be wondering, “What’s the point of debt consolidation loans?” 

Here are a few advantages:

  • Pay less in interest
  • Convenience
  • Improve your credit score

Pay Less in Interest

The biggest reason consumers apply for debt consolidation loans bad credit is that it typically lowers their interest rate. Instead of paying 25% annually, they pay more reasonable rates, generally around 5% – 15%.

Convenience

Debt consolidation loans reduce your chances of missing payments. You won’t have to pay or keep track of multiple credit card balances.

Improve Your Credit Score

Paying the minimum monthly installment on your debt consolidation loan on time can increase your credit score. By doing this, you’re showing banks that you’re a responsible consumer.

Where to Get a Debt Consolidation Loan With Bad Credit

Need help finding debt consolidation loans with bad credit? Consider these options:

  • Your bank or credit union
  • Online lenders
  • Private lenders

Your Bank or Credit Union

I always suggest you start by applying at your current bank. If you have a good relationship with them, they are more likely to approve your application and provide affordable interest rates.

You could also approach your credit union, as they usually offer services like a balance transfer credit card. This is similar to a debt consolidation loan, but it transfers all your debt into one credit card. A balance transfer credit card will usually give you a 12 to 24-month interest-free period to pay it off.

Online Lenders

The problem with traditional banks is that they typically conduct hard credit inquiries, which lowers your credit score. 

Online lenders are a better alternative if you’re applying for several loans at once. They conduct “soft checks” that have no effect on your credit report.

Check out this guide on loans for bad credit. It also covers the five best online lenders. 

Private Lenders

If you can’t qualify for a loan, try asking a private lender like family members and friends. Your family lawyer (or Google) will be able to draw up a contract you can both feel comfortable with. 

You’ll be able to access a debt consolidation loan without approaching banks or credit unions.

How to Get a Debt Consolidation Loan With Bad Credit

Although debt consolidation is simple, you’ll be left with even more debt if you don’t do it correctly. But don’t worry. This five-step consolidation process will help you become debt-free.

  1. Create a written budget
  2. Monitor your credit score
  3. Shop around for the lowest interest rates
  4. Offer collateral
  5. Apply for debt consolidation loans

Step 1: Create a Written Budget

The biggest mistake most people make when consolidating debt is not creating a budget.

So, create a budget and stick to it. Your budget can be flexible, but track how much credit card debt you’re accumulating every month and reduce it to a realistic amount.

Some credit card companies even have mobile apps that allow you to set a monthly limit, preventing you from overspending.

Step 2: Monitor Your Credit Score

Next, it’s time to monitor (and improve) your credit score. This is important because your credit score directly impacts the interest rates you qualify for.

The better your credit score, the less interest you’ll pay.

If your credit is in the “fair” range, don’t be afraid to wait a few months. Waiting until after you increase your credit score is worth it. It helps you get the most affordable interest rate possible, lowering your monthly installments.

Fortunately, you can pull a credit report within seconds from the three major credit bureaus:

  1. Equifax
  2. Experian
  3. TransUnion

The first time I pulled my credit report, I noticed a few errors. I requested changes, and luckily it boosted my credit score. 

So if you spot any mistakes, don’t hesitate to dispute them. It’ll bring you one step closer to getting that low-interest debt consolidation loan.

Step 3: Shop Around For The Lowest Interest Rates

Once your credit score is on track, shop around for the best interest rates.

Start by visiting your bank and applying for a loan (if you have a good relationship with them). You most likely have been working together for years,  so they’ll be more inclined to provide favorable interest rates.

If your score is low and you explain your situation to them, they might look past your credit report and help you consolidate the debt.

Step 4: Offer Collateral

Most debt consolidation loans for bad credit are unsecured, meaning they aren’t backed by anything.

This is a problem because banks rely on a customer’s creditworthiness, and if this customer cannot pay back the loan, banks have nothing to fall back on.

So banks are extra careful when giving out unsecured loans.

To increase your approval chances, take out a secured loan by offering collateral. This acts as an alternative payment method if you default. It also increases your likelihood of approval because it lowers the risk for the bank.

This collateral could be in the form of a savings account, home, or car.

Step 5: Apply For Debt Consolidation Loans

The application process between lenders may differ, but here are some documents that most lenders will ask for:

  • Proof of Identity – Includes two forms of government-issued identification, such as driver’s license, state ID, passport, birth certificate, or military ID.
  • Proof of Income – W-2s, paystubs, 1099s, bank statements, or tax returns.
  • Employer’s Information – Company name, manager name, and contact info.
  • Proof of Residence – Utility bill, lease agreement, mortgage statement, property tax receipt, insurance statement, or voter registration card.

Online lenders will typically let you know if you’ve qualified on the same day, while traditional banks take a few business days. 

Once your lender has released the loan into your account, you can pay off your debt and begin making payments on your debt consolidation loan. 

Alternatives to Debt Consolidation Loans for Bad Credit

Debt consolidation loans bad credit aren’t for everybody. If you’re concerned about struggling to keep up with your loan payments because of your spending habits, here are a few alternatives:

  • Balance transfer credit cards
  • Home equity loans
  • Debt settlements

Balance Transfer Credit Cards

A balance transfer credit card is when you transfer debt from another credit card to a new one with an interest-free period. The interest-free period is usually between 12 to 24 months. This gives you a chance to pay off your debt interest-free.

Remember, you’ll only have a small window to pay off your debt without interest. So, this would be a fantastic time to build a budget and reevaluate your spending habits. 

Home Equity Loans

Home equity loans are effective at not just consolidating debt but getting rid of it entirely. 

This is because you’re offering your home as collateral. Many consumers agree that the stress of potentially losing their home if they can’t pay back the loan pushes them to budget and control their spending.

It’s a bit extreme, but if you need serious motivation, home equity loans could help get you back on track.

Debt Settlements

If your credit card debt is sky high and you think there’s no way you’ll be able to pay it off in full, try a debt settlement. 

A debt settlement is when you or a third party negotiate with the credit card company to settle your debt for less than you currently owe. 

Debt settlements are also known as debt relief or debt adjustments. 

There are companies that offer to help you negotiate with creditors, but be mindful that all agreements are not final until you have them in writing. 

Commonly Asked Questions About Debt Consolidation Loans Bad Credit

Can You Get a Debt Consolidation Loan With a 500 Credit Score? 

Yes, you can get a debt consolidation loan with a 500 credit score. Although, you will most likely get stuck with a high-interest rate. Here are some companies that specialize in loans for bad credit.

What Credit Score Do You Need to Consolidate Debt?

There is no minimum credit score standard for debt consolidation loans. However, the better your credit score is, the better interest rate you’ll qualify for. A good credit score is usually between 680 – 739

How Do I Get Out of Debt With No Money and Bad Credit?

You can get out of debt with no money and bad credit by applying for a balance transfer credit card. It lets you transfer all your debt to a single account and will provide an interest-free period. If you can’t get a balance transfer credit card, consider a debt settlement. 

Is It Bad to Apply For a Debt Consolidation Loan?

No, it is not bad to apply for a debt consolidation loan. In fact, debt consolidation loans are great options for people who want to roll their debt into one payment and find a better interest rate. 

Does Debt Consolidation Give You Bad Credit?

Debt consolidation loans bad credit will raise your credit score in the long run if you make the minimum monthly payments. You’re showing the credit bureau that you’re a responsible consumer who can pay off debt on time.

Where Can You Get a Debt Consolidation Loan With Bad Credit?

The best place to get a debt consolidation loan bad credit is your current bank. Assuming you have a good relationship, they can provide you with a competitive interest rate. Online lenders and credit bureaus are also awesome options because of their easy application process and quick payouts.

How Do I Qualify For a Consolidation Loan?

You can qualify for a consolidation loan by checking your credit score, comparing your options, choosing a lender with the lowest interest rates, applying, and, once you’re approved, start making monthly payments. Have a poor credit score? Check out this article to find the best loans for bad credit!

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