How to Get a Debt Consolidation Loan With Bad Credit

A debt consolidation loan is a great option if you are struggling to manage your debts and have multiple creditors. This loan type allows you to consolidate your debts into one monthly payment.

Be sure to understand the pros, and cons of a debt consolidation. You may have a hard time getting a loan if you have bad credit. However, you can improve your chances by taking the right steps.

What is a debt consolidation loan?

You can consolidate your debts with a debt consolidation loan. You will only have to pay one bill for all your debts, and you won't be stressed by managing multiple bills.

A debt consolidation loan may also help you lower your interest rate, saving you money and allowing you to pay off your debts more quickly.

Jeff Arevalo is a financial wellness expert with GreenPath Financial Wellness.

The Pros and Cons Of A Debt Consolidation loan

Pros:

Your finances are simplified. The number of payments and due dates are reduced with a debt consolidation loan. It's less likely that you will pay late, miss a payment or incur penalties and charges if you consolidate your debt. You may have lower interest rates. The interest rate for a consolidation loan is often lower than rates you had on your previous debts. Your credit score could be improved. Your credit score can be improved by paying off revolving credit lines. Making regular payments on your debt consolidation loans can also improve your credit score.

Cons:

You might have to pay an upfront fee. Arevalo states that "most loans require a upfront origination fee." You may end up with "teaser rates". Your overall costs could be higher. A debt consolidation loan can extend your repayment period in some cases. Your financial issues won't be solved every time. You may revert to bad habits if you've lived beyond your means in the past. Meyer warns that if you consolidate your debt but continue to use credit cards without changing the behaviors that led to the debt you could end up with more debt. Then you're left with a consolidation loan and credit card debt.

What is the minimum credit score for a debt consolidation loan?

You may qualify for a consolidation loan if you have fair or better credit. This is a minimum FICO score of 580. Even if your credit is less than perfect, you may decide that a loan is not the best idea.

You could end up paying a higher rate of interest than you do on your revolving credit. Arevalo says that if your credit rating isn't optimal, it will be easier to qualify for loans at a higher rate.

Shop around to see what kind of deal you can find.

How to get a debt consolidation loan with bad credit

There are several options available to you when looking for a loan to consolidate debts with bad credit.

How to Get a Loan for Debt Consolidation With Bad Credit

It can be hard to get a loan for debt consolidation if you have bad credits, but it is not impossible. Here are some tips to increase your chances:

Check your credit rating. You can determine which loans are right for you by knowing your credit score. Prequalify and compare. Compare the terms of different lenders before applying for debt consolidation loans. Spread your wings. You may be able to qualify for a loan if you apply with a cosigner.

Compare debt consolidation loans for bad credit with these tips

Comparing offers is important when you have bad credit and are looking for a loan to consolidate debt.

Arevalo advises to make a plan before shopping. "Assess how much money you will need to avoid taking on more than you can afford," he advises. "Make sure you're able to pay back the loan on time."

Compare multiple quotes and look for lenders who offer prequalification without a hard inquiry, which won't harm your credit score.

Do not skip the fine print. Before you apply for a loan, you'll want to check the math and make sure that the loan is saving you money.

Beware of predatory lenders. Avoid companies who promise you a loan in exchange for an upfront payment. Payday loans can also be a bad idea for consolidating debts because of their high annual percentage rates (APR) and short repayment periods.

Can debt consolidation loans damage your credit?

The consolidation of debt can temporarily damage your credit, but it will lead to long term gains.

Your credit score can be affected by a temporary drop due to the hard credit inquiry you make when applying for a loan or opening a new account. Lenders may see this as a potential risk. The average age of your account and credit score will be affected by a new account. However, the impact is greater if you have little credit history.

If you improve your payment record or lower your credit utilization rate (the percentage of credit available that you are using), a consolidation loan may help your credit score.

Meyer says that getting approved for a consolidation loan can be a positive experience. If you pay off your high-interest debts and other bills, but do not add new balances to the account, it will lower your credit utilization score.

Your score can be improved by making timely payments for your consolidation debt loan. Payment history makes up 35% of your FICO Score.

What to do if you don't qualify for a debt consolidation loan

Your application for a consolidation loan may not be approved in some cases.

You will receive a written explanation from the lender as to why your application for a loan was denied. This can sometimes give you clues on how to fix the problem and get your loan approved.

Another bank or credit union may be willing to grant you a small loan. You might find that another lender is more willing to give you a loan. Each lender uses its own criteria when deciding what loans are approved.

You might be able to qualify later, even if not now. Your credit score will improve if you pay all your bills on-time and don't add any more debt.

Arevalo advises: "Look at your debt-to-income and income ratio." Perhaps it is best to wait until you improve your credit.

Alternatives for Consolidating Debt with Bad Credit

You don't have to use a personal loan to consolidate your debt. Consider these debt consolidation alternatives if you have bad credits:

Your budget should be adjusted. Create a budget if you don't already have one. Review and adjust your budget if necessary. Try a budgeting application to track your spending and help you rein it in.

Negotiate rates of interest. Ask for a lower rate of interest by contacting each card issuer individually. Arevalo explains that if you've had a good payment record, your chances of success increase. If your credit rating is not optimal, he suggests building it up before you make the request.

Make more money. Find a way of generating extra cash, and use that money to pay off your debt. Meyer suggests that you take on a second job, or even start a side business.

Consider a credit card that allows you to transfer your debt. Transferring debt onto a credit card that offers an introductory APR of 0% for at least 12 month could be a good idea. This will give you more time to repay the debt. You will need a FICO of at least 670 to qualify. Also, you may not have the ability to pay off all your debts before the interest free period ends. Some cards also charge fees ranging from 3% to 5 percent of the transferred amount.

A home equity line of credit or loan could be used to consolidate debt, but this can be risky. Arevalo explains that this is a secured debt, which means if you default you may lose your house to foreclosure.

Cash out refinancing should be evaluated. You could refinance and get some cash from your equity if it makes sense. You could lose your home if you don't make payments.

Join a debt management program. Credit counselors who are nonprofits can help you develop a plan for repaying your creditors over a period of three to five year with one monthly payment. Plans can lower interest rates and improve credit scores over time. However, some creditors may refuse to participate.

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