How to Get a Debt Consolidation Loan With Bad Credit - NerdWallet (2024)

Getting a debt consolidation loan if you have bad credit may require some shopping 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) and consider factors beyond score, such as education, income and job history.

Here's how to determine when a debt consolidation loan is a good idea for tackling your debt and how to get one.

A debt consolidation loan is a personal loan 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 one monthly payment.

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

1. 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 check your credit report weekly for free at each of the three major credit reporting bureaus — Experian, Equifax and TransUnion — using AnnualCreditReport.com.

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

Another tip is to pay off any small debts. This lowers your credit utilization, which accounts for 30% of your credit score. It can also improve your overall debt-to-income ratio, which lenders use to evaluate your ability to repay a loan. The lower the DTI ratio, the more likely a lender may approve your loan application.

2. Consider a secured, co-signed or joint loan

Some types of personal loans may be easier to qualify for, including a secured, co-signed or joint loan.

With a secured loan, you use collateral like a car or savings account to help guarantee the loan, which means lenders may be more likely to approve you or extend a lower interest rate. But if you fail to pay back the loan, you lose the collateral.

Adding a co-signer with a better credit score or higher income than you can also boost your chances of approval. However, note that a co-signer takes on equal responsibility for the loan, even though they don’t have access to the funds. If you miss payments or fail to repay the loan, your co-signer’s credit score may suffer.

Joint loans are similar to co-signed loans, but the co-borrower has equal access to the funds.

3. Shop around and pre-qualify

To get the best deal on your debt consolidation loan, you’ll want to compare interest rates and terms from multiple lenders, and the easiest way is through pre-qualifying. You can pre-qualify with most online lenders to see estimated rates and loan amounts. This involves a soft credit check, which doesn't hurt your credit score.

Also look for consumer-friendly features like 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 cash for something else.

4. Apply for the debt consolidation loan

Once you’ve chosen a lender, you’ll need to apply for the loan. This process is typically online, and you’ll be asked to provide personal information, including your Social Security number, and documents that verify your identity, income and employment.

Approval time can vary by lender. You’ll usually receive the funds within one week, although many online lenders offer same- and next-day funding.

5. Pay down debt and keep up with loan payments

Once you receive the funds in your account, use them to pay off your debts. If the funds are being sent to your creditors for you, confirm with each creditor that your debt was successfully paid off.

Next, make a plan to manage your loan, which may include building a budget that prioritizes your new monthly payment and keeping an eye on any refinancing opportunities.

Most lenders charge a late fee for missed payments — and report them to the credit bureaus, which can hurt your score — so consider setting up automatic payments to avoid falling behind.

Credit unions

Credit unions are not-for-profit financial organizations that may offer more flexible terms and lower rates than online lenders.

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

Some credit unions don’t allow you to pre-qualify for a loan; applying requires a hard credit check, which can temporarily lower your credit score and make it harder to shop around.

You also need to become a member of the credit union 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, though national credit unions also offer debt consolidation loans.

Online lenders

Online lenders are more convenient and often provide fasting funding, but they may charge higher rates for bad-credit borrowers than credit unions do.

Online lenders may also charge origination fees that cover the costs of processing your loan. The fee is typically deducted from the loan proceeds, so you might have to request a larger loan to get the full amount you need.

Upgrade is one of the best online lenders for a bad-credit loan. If you get a debt consolidation loan and have Upgrade send the funds directly to your creditors, you can qualify for an additional rate discount of 1 to 3 percentage points.

Upstart also accepts applications from borrowers with bad credit and will evaluate alternative data on your application, like college major and work history, which could boost your odds of approval and getting a low rate.

If you’re struggling to pay off debt and can qualify for a low enough interest rate on a loan, debt consolidation is generally a good idea.

Here are some of the benefits:

If debt consolidation loans won't work for you, here are some possible alternatives.

Other debt payoff methods

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

The snowball method uses early wins to keep you on track to becoming debt-free. In this method, debts are arranged from the smallest balance to the largest. Once the smallest debt is repaid, the monthly payment for that debt goes toward the next-smallest balance until that's paid off. Then, you continue to roll payments toward each debt until you're debt-free.

The avalanche method follows a similar strategy, but it starts with your highest-interest debt. Then when that’s paid off, you tackle the second-highest-interest debt and so forth until all debts are paid. This approach can save money and ultimately time, but it 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 reduce your interest rate and pay off debt faster. It’s an option if you have credit card debt and if you can stick to a payment plan for several years while not using the credit cards.

Bankruptcy

Discharging your debts in bankruptcy may be an option if you are overwhelmed by debt and it will take five years or longer to repay it through consolidation. Bankruptcy wipes out most kinds of unsecured debt, including credit cards and medical bills.

While your credit score may initially take a hit, it should begin to recover within a year after filing for bankruptcy.