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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 FICO) 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.
What is a debt consolidation loan?
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.
Is a debt consolidation loan a good idea?
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:
It saves money on interest. Arguably the biggest benefit of debt consolidation is the money you save on interest by consolidating debt under a lower rate. Even a couple of percentage points makes a big difference in overall interest saved. Use our debt consolidation calculator to see your potential savings.
You may pay off debt 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 short repayment term on a debt consolidation loan, as long as you can afford the monthly payments.
It simplifies the process. Instead of keeping track of multiple debts, with a debt consolidation loan, you’ll have only one payment to make. Debt consolidation loans also have fixed terms, so you’ll know your payoff date, which can keep you motivated.
It could build your credit. Though taking out a debt consolidation loan will temporarily knock a few points off your credit score, the overall effect should be positive as you start to dig 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 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 (a FICO score of 630 to 689) could also lead to a more affordable loan with a lower interest rate.
Improve your debt-to-income ratio
If you don’t need to consolidate debts right away, consider ways to increase your income and pay off small debts. This improves your 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.
Add a co-signer
Some lenders allow co-signers, which can help you qualify for a loan and get a lower rate. Typically, the co-signer’s credit score must meet or exceed the lender’s minimum requirement.
Keep in mind that the co-signer takes on equal responsibility for the loan. If you miss payments or fail to repay the loan, your co-signer’s credit score may suffer.
» COMPARE: Personal loans with a co-signer
Compare interest rates and terms from multiple lenders to get a loan with repayments that fit your budget. You can pre-qualify with most online lenders and see estimated rates. This involves a soft credit check, which doesn't hurt your credit score.
Look for consumer-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 cash for something else.
Where to get a debt consolidation loan for bad credit
Minimum credit score
7.49% - 18.00%.
18.00% - 35.99%.
5.42% - 35.99%.
7.96% - 35.97%.
11.69% - 35.93%.
at Universal Credit.
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%.
Credit unions don’t typically 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.
Online lenders provide fast funding, since you can often complete the application online and get funded within a few days.
Online lenders may charge higher rates for bad-credit borrowers than credit unions do. In 2021, borrowers with bad credit (below 630 FICO) qualified for an average estimated APR of 25.3%, according to a NerdWallet survey.
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 5 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 use the loan to pay off credit card debt, Upstart will send the funds to your credit card issuers.
» COMPARE: Best debt consolidation loans for bad credit
Debt consolidation loan alternatives
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 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 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.
» MORE: Compare debt management plans
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 months after filing for bankruptcy.