How to Qualify for a Debt Consolidation Loan If You Have Bad Credit

A photo to accompany a story about how to get a debt consolidation loan with bad credit Getty Images

We want to help you make more informed decisions. Some links on this page — clearly marked — may take you to a partner website and may result in us earning a referral commission. For more information, see How We Make Money.

It’s easy to feel overwhelmed by high-interest debt, especially. If you have debt from multiple lenders. In order to stay afloat, you might make monthly payments that only cover interest, barely making any progress towards paying down the principal balance. 

But there is a path forward. Debt consolidation is a strategy that combines multiple debts into a single payment at a lower interest rate, which can help you get out of debt faster. “If you have high-interest debt under different accounts, consolidation is your best option,” says Michael Foguth, founder of the Foguth Financial Group, a Detroit financial planning firm.

Pro Tip

If you’re looking to take full advantage of debt consolidation loans, shop around.

One option is a debt consolidation loan, which is a type of personal loan issued to pay off debts. You then make payments towards this loan instead of multiple creditors. But in order to get the best rates, you need to have good credit. 

Debt Consolidation Loan Alternatives

A debt consolidation loan may be the best solution to manage multiple high-interest debts. However, that option is not available to everyone, especially when you have poor credit. If you have bad credit, you can work on improving your credit before consolidating your debt. There are other alternatives to a debt consolidation loan as well.

1. Negotiate with lenders

One option is to contact your lenders and negotiate to lower the interest that you’re paying for each debt. This may sound like a farfetched scenario, but if you have a good repayment history, lenders will be more willing to work with you to keep you.

2. Credit Counseling

You can typically find free or low-cost credit counseling service from a non-profit. The focus is on education and debt management skill-building. Credit counseling can also help break bad debt habits and instead build a foundation of financially healthy behaviors to help prevent future debt scenarios. The National Foundation for Credit Counseling is a great place to start your search. 

3. Bankruptcy

If your debt is completely unmanageable, you’re having a hard time keeping up with your bills, and looking into other options to consolidate, negotiate, or settle debt with lenders doesn’t work, you may consider bankruptcy as a last resort. Bankruptcy is considered an extreme measure and a last resort option because it will stay on your record for up to 7 or 10 years, depending on which type of bankruptcy you are filing.

How to Get a Debt Consolidation Loan with Bad Credit 

A credit score of 720 or better is preferred in order to get advantageous rates and terms on a debt consolidation loan, according to Foguth. If your FICO score is below 600, it might be challenging to qualify for debt consolidation loans. A score below 580 is considered poor credit, according to credit reporting company Experian, which will make it more difficult to qualify for this type of loan. Because the objective is to get a lower interest rate, you want to increase your chances of obtaining good loan terms.

Applying for a loan when you feel confident that you will get approved is the ideal situation because being denied for a loan is likely to have a negative effect on your credit score.

Here are a few steps that you can take to position yourself to get approved for debt consolidation loans.

1. Check your credit score and review your credit report

You can get a good understanding of your credit standing if you check your credit score and review your credit report. You can get a free copy of your credit report at annualcreditreport.com.  Doing this in advance will help you avoid surprises when it’s time to apply for a loan. As you review your credit report, identify any items that negatively affect your credit, such as errors. You can dispute any discrepancies by contacting the reporting agency with supporting documentation.

2. Pay your debt on time 

Financial institutions want to provide loans to customers with good payment history. Paying your bills on time and catching up on debt payments makes you a more attractive borrower. If you missed a payment, you could call your lender and negotiate to avoid a penalty on your credit score and save you money on late fees.

3. Optimize your current credit

Ideally, you should keep your debt ratio below 40%. For example, if you have a $1,000 credit limit, don’t carry more than $400 on that card, said Foguth. This suggestion applies across all your lines of credit. One tactic is to work on getting your debt ratio below 40% before applying for a debt consolidation loan. Also, you might want to avoid the temptation of opening up a new credit card. It’s not wise to apply for new credit if you plan to consolidate your loans because it will likely have a negative impact on your credit score.

4. Get a co-signer

If you have a family member or friend with good credit willing to co-sign on a debt consolidation loan, that is one option to consider. By adding their name to the application, you would benefit from their good credit history. However, there is one significant downside. If you don’t pay your loan on time every month, their credit score will suffer. Make sure your family member understands what is at stake before co-signing, and you should be prepared to commit to paying your bills on time until the end of the loan.

Where to Get a Debt Consolidation Loan With Bad Credit 

When you’re ready to apply for debt consolidation loans, it pays to be prepared. You will have to provide information regarding your different debts, interest rates, and loan terms.

Banks, credit unions, and other financial institutions offer multiple options for debt consolidation loans. It’s important to shop around to find the lowest interest rate and the best terms for your situation. “Don’t be content with the first offer you receive,” said Foguth. “If you have average to good credit, you’re in the driver’s seat; take advantage of it. If you have bad credit, consider improving your credit before applying for debt consolidation loans.”

1. Brick and mortar locations

Going to multiple physical locations to shop around for a loan can be time-consuming. But investigating your options in person will protect you from having your information shared widely with other institutions. If you have a good relationship with your current bank, that is a great place to start. You can then visit other locations to get more offers before making a decision.

2. Online destinations

Shopping online for a loan is convenient. It gives you a bigger pool of institutions to consider for your debt consolidation loan and can sometimes provide more advantageous rates. However, this method comes with the risk of having your information shared with other companies beyond your control. “The internet is great to shop around, but companies are going to sell your information. As a result, you will receive multiple calls. If you’re okay with it, then it might be the best option for you” said Foguth. 

How to Manage Debt Consolidation

Once your debt consolidation loan is approved, your debt will be under one institution. This should make keeping up with your bills easier, but you will still have to take proactive steps to manage your loan.

1. Create a budget

To take advantage of debt consolidation to pay off your debt, you have one major obligation: Make payments on time and in full every month. If you’re worried about getting behind, it may help to include the minimum payment amount as a cornerstone of your overall monthly budget. You’ll avoid the guessing game of where that money will come from and you can consistently pay down your debt.

2. Track your expenses

Reviewing your expenses on a weekly or monthly basis can help you stay on track with your budget. It also helps identify patterns and behaviors such as overspending in a specific area, allowing you to adjust your spending in the future.

3. Set up autopay

Paying your bills on time will help improve your credit score. Missing a payment will likely result in an increased interest rate, which would cancel the benefit of debt consolidation — and you want to avoid that from happening. You can set up autopay to transfer the loan payout amount every month (an ideal time for that transfer would be right after you receive your income) and that consistent habit can help you stay on top of your debt.

4. Pay more than the minimum payment

If it’s a possibility for you, paying more than the minimum payment due on your loan will help pay down the debt faster and save money on interest charges over the long term. Even if it’s not within your financial means to do this every month, any money put toward your loan over the minimum payment will benefit you.