How to get a debt consolidation loan with bad credit


Obtain a debt consolidation loan If you have bad credit, you may need to shop around, but there are options, including loans from credit unions and online lenders.

Some lenders even cater specifically to borrowers with bad credit (a credit score below 630 FICO) and consider factors other than the score, such as education, income, and work history.

Here’s how to determine when a debt consolidation loan is a good idea to settle your debt and how to get one.

What is a debt consolidation loan?

A debt consolidation loan is a personal loan that you use to combine and pay off multiple debts at once – think credit card balances, medical bills or other unsecured personal loans – so you’re left with just one. monthly payment.

Ideally, this payment comes with a lower interest rate than your current debts, which can save you money and help you get out of debt faster.

Is a debt consolidation loan a good idea?

If you’re struggling to pay off your debts and can get a low enough interest rate on a loan, debt consolidation is usually a good idea. Here are some of the benefits:

  • It saves money on interest. Arguably the biggest benefit of debt consolidation is the money you save on interest by consolidating debt at a lower rate. Even a few percentage points make a big difference in the overall interest saved. Use our debt consolidation calculator to see your potential savings.

  • You can pay off your debts faster. When you consolidate at a lower interest rate, you can get out of debt faster by applying the savings to your remaining balance. You can also choose a shorter repayment term on a debt consolidation loan, as long as you can afford the monthly payments.

  • This simplifies the process. Instead of keeping track of multiple debts, with a debt consolidation loan you only have to make one payment. Debt consolidation loans also have fixed terms, so you’ll know your repayment date, which can keep you motivated.

  • This could strengthen your credit. Although taking out a debt consolidation loan will temporarily lower your credit score by a few points, the overall effect should be positive when you start getting out of debt.

How to get a debt consolidation loan with bad credit

Check your credit report

Are mistakes on your credit report the reason your score is low? Check for errors such as wrong accounts, incorrectly reported payments, or inaccurate credit limits.

You can view your credit report each week for free at each of the three major credit bureaus – Experian, Equifax and TransUnion – using AnnualCreditReport.com.

Be prepared for any loan request

NerdWallet tracks your credit score and shows you how to build it – for free.

Even a small bump in your credit score can increase your chances of qualifying for a debt consolidation loan. Going from a bad to a good credit score (a FICO score of 630 to 689) could also lead to a more affordable loan with a lower interest rate.

Improve your debt ratio

If you don’t need to consolidate your debt right away, consider ways to increase your income and pay off small debts. It improves your debt to income ratio, which lenders use to assess your ability to repay a loan. The lower the DTI ratio, the more likely a lender will approve your loan application.

Add a co-signer

Some lenders allow co-signers, which can help you get a loan and get a lower rate. Generally, the co-signer’s credit rating must meet or exceed the lender’s minimum requirement.

Compare the prices

Compare interest rates and terms from multiple lenders to get a loan with repayments that fit your budget. You can pre-qualified with most online lenders and view estimated rates. This involves a soft credit check, which does not hurt your credit score.

Look for user-friendly features such as direct payment to creditors, which means the lender sends the loan funds to your creditors, simplifying the process and eliminating any temptation to use the money for something else.

Where to Get a Debt Consolidation Loan for Bad Credit

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NerdWallet Ranking

NerdWallet ratings are determined by our editorial team. The scoring formula takes into account factors we consider favorable to consumers, including impact on credit score, rates and fees, customer experience and responsible lending practices.

4.0

NerdWallet Ranking

NerdWallet ratings are determined by our editorial team. The scoring formula takes into account factors we consider favorable to consumers, including impact on credit score, rates and fees, customer experience and responsible lending practices.

4.5

NerdWallet Ranking

NerdWallet ratings are determined by our editorial team. The scoring formula takes into account factors we consider favorable to consumers, including impact on credit score, rates and fees, customer experience and responsible lending practices.

5.0

NerdWallet Ranking

NerdWallet ratings are determined by our editorial team. The scoring formula takes into account factors we consider favorable to consumers, including impact on credit score, rates and fees, customer experience and responsible lending practices.

4.5

NerdWallet Ranking

NerdWallet ratings are determined by our editorial team. The scoring formula takes into account factors we consider favorable to consumers, including impact on credit score, rates and fees, customer experience and responsible lending practices.

credit unions

credit unions are non-profit financial organizations that can offer more flexible terms and lower rates than online lenders.

Federal credit unions cap annual percentage rates on personal loans at 18%.

Credit unions generally do not allow you to pre-qualify for a loan; the app requires a thorough credit check, which may temporarily lower your credit score and make shopping more difficult.

You must also become a credit union member to apply for a loan, which may mean living or working nearby and paying a small membership fee. A local credit union is a good place to start.

Online lenders

Online lenders provide fast funding, as you can often complete the online application and get funding within days.

Online lenders can charge borrowers with bad credit higher rates than credit unions. In 2021, borrowers with bad credit (below 630 FICO) qualified for an estimated average APR of 25.3%, according to a NerdWallet survey.

Online lenders may also charge assembly costs that cover your loan processing fees. Fees are usually deducted from loan proceeds, so you may need to apply for a larger loan to get the full amount you need.

Upgrade is one of the best online lenders for bad credit loans. If you get a debt consolidation loan and Upgrade sends the funds directly to your creditors, you may qualify for an additional rate reduction of 1 to 5 percentage points.

Reached also accepts applications from borrowers with bad credit and will assess alternative data on your application, such as college major and work history, which may increase your chances of being approved and getting a low rate. If you use the loan to pay off credit card debt, Upstart will send the funds to your credit card issuers.

Debt Consolidation Loan Alternatives

If debt consolidation loans don’t work for you, here are some possible alternatives.

Other Methods of Repaying Debt

The snowball and debt avalanche methods are popular strategies for paying off debt without consolidation.

The snowball method uses early earnings to keep you on track to debt relief. In this method, debts are ranked from smallest balance to largest. Once the smaller debt is paid off, the monthly payment for that debt is allocated to the smaller balance until it is paid off. Then you continue to repay each debt until you are debt free.

The avalanche method follows a similar strategy, but starts with your highest interest debt. Then when that is paid off, you tackle the second highest interest rate debt and so on until all debts are paid off. This approach can save money and ultimately time, but may not have the quick wins of the snowball method.

Debt management plan

A debt management plan from a nonprofit credit counseling agency can help you lower your interest rate and pay off your debts faster. This is an option if you have credit card debt and can stick to a payment plan for several years without using credit cards.

Bankruptcy

Paying off your debts in bankruptcy may be an option if you are overwhelmed with debts and it will take you five years or more to pay them off through consolidation. Bankruptcy wipes out most types of unsecured debt, including credit cards and medical bills.

Although your credit score may initially suffer, it should start to recover a few months after filing for bankruptcy.

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