How to Get a Debt Consolidation Loan With Bad Credit

How to Get a Debt Consolidation Loan With Bad Credit article image.

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Debt consolidation loans allow you to streamline multiple debts into one account, making your debt easier to manage and saving you money if you can secure a lower interest rate. Getting a debt consolidation loan can be a challenge if your credit is less than ideal, but it is possible.

You can get a debt consolidation loan with bad credit by working with online lenders with less-stringent requirements than traditional banks or credit unions. These financial institutions may be more willing to work with borrowers who wouldn't otherwise be able to qualify for a loan. Other options include securing the loan with collateral or finding a cosigner with strong credit.

What Is Considered a Bad Credit Score?

A bad credit score is one that falls below 670, which is classified as either fair or poor according to FICO® Score , the credit score used by 90% of top lenders. FICO® Scores range from 300 to 850 and break down as follows:

  • Poor (300 to 579): Having a FICO® Score in this range generally makes it difficult to get approved for a consolidation loan or other credit products. If a lender does approve your loan with a credit score in this range, be prepared to pay higher interest rates.
  • Fair (580 to 669): Lenders may consider applicants with fair credit as subprime borrowers and only approve you for a loan with a substantially higher interest rate than would be available to someone with good or exceptional credit.
  • Good (670 to 739): According to 2022 data from Experian, the average credit score in the U.S. is 714, which falls squarely in the good credit score range. Borrowers in this credit range are generally responsible with credit, with only 8% deemed likely to become delinquent on a bill.
  • Very good (740 to 799): One-quarter of consumers fall into this category, with credit scores that usually make them eligible for above-average rates.
  • Exceptional (800 to 850): With a credit score of 800 or higher, you'll find easier approval on loans, credit cards and other credit products. You're also likely to be offered the best rates available to applicants for any given credit product.

Best Debt Consolidation Loan Options

While consolidating debt can help simplify your finances, some loans can come with higher interest rates than your current loans if your credit isn't where you'd like it to be. In that case, consider offers from online lenders that often have more flexible requirements than traditional ones.

For example, Upstart considers more than credit score and income when evaluating loan applications. The lender uses artificial intelligence to review over 1,600 data points, including education level, employment history and income, when deciding whether to approve you for a loan.

Upstart

Personal Loan (Generic) - 36 months image.See if you're eligible

Poor - Exceptional

Est. APR

7.8 - 35.99%

Term

36

Amount

Available loan amounts: $1,000 to $50,000

Est. monthly payment: $31 to $2,262

Grace period: 15 days

Application fee: $0

Loan Details
  • Loan amounts from $1,000 - $50,000
  • APRs from 7.8% - 35.99% with loan terms of 3 or 5 years
  • Won't affect your credit score
  • You can have funds in as fast as 1 day
  • You are more than your credit score. On Upstart your education and experience help you get the rate you deserve.
Disclosure

You can prequalify for a personal loan of up to $50,000 without affecting your credit. According to Upstart, the company's rates are 43.2% lower when compared with a credit score-only model.

LendingPoint

Personal Loan (Generic) - 24 months image.See if you're eligible

Fair - Good

Est. APR

7.99 - 35.99%

Term

24

Amount

Available loan amounts: $2,000 to $15,000

Est. monthly payment: $90 to $878

Grace period: 0 days

Application fee: $0

Loan Details
  • Loans from $2,000 to $36,500 and no prepayment penalties
  • Rates from 7.99% to 35.99% APR
  • Check your rate without impacting your credit score
  • Simple online application
  • Funds available as soon as the next business day upon approval
  • LendingPoint's innovative technology allows them to understand the individual creditworthiness of every applicant
  • Terms from 24 - 72 months
  • Fixed monthly payment and simple interest
  • LendingPoint has thousands of five-star reviews on Trustpilot
  • LendingPoint has an A+ rating from the Better Business Bureau
Disclosure

LendingPoint offers personal loans ranging from $2,000 to $36,500 and terms from two to seven years. The lender also considers factors beyond your credit score, including your state of residence and income.

SoFi

Personal Loan - 24 months image.See if you're eligible

Good - Exceptional

Est. APR

8.99 - 29.99%

Term

24

Amount

Available loan amounts: $5,000 to $100,000

Est. monthly payment: $226 to $5,540

Grace period: 10 days

Application fee: $0

Loan Details
  • Personal Loans with low fixed rates
  • Borrow up to $100,000
  • No Origination Fees Required, No Prepayment Penalties, and No Late or Overdraft Fees
  • Simple online application with live support 7 days a week
  • Apply Now
Disclosure

With good credit, you may qualify for a SoFi debt consolidation loan of up to $100,000 with no origination, prepayment or late fees. Loan terms vary from two to seven years and come with unemployment protection, which offers temporary forbearance if you lose your job.

Best Egg

Personal Loan - 36 Months image.See if you're eligible

Fair - Exceptional

Est. APR

8.99 - 35.99%

Term

36

Amount

Available loan amounts: $2,000 to $50,000

Est. monthly payment: $63 to $2,262

Grace period: 0 days

Application fee: $0

Loan Details
  • You could get money in your account in as little as one business day
  • With a fixed APR, your monthly payment will be the same
  • No pre-payment penalties if you choose to pay it down quicker
  • Trusted company with an A+ BBB rating and a 4.8/5 Trustpilot TrustScore‡
Disclosure

Best Egg's preapproval process allows you to get a personal loan offer without impacting your credit scores. Debt consolidation loans are available from $2,000 to $50,000, with limits that vary by state. Best Egg claims half of their customers receive their money within one business day.

Prosper

Personal Loan (Generic) - 60 months, 640-850 image.See if you're eligible

Poor - Exceptional

Est. APR

8.99 - 35.99%

Term

60

Amount

Available loan amounts: $2,000 to $50,000

Est. monthly payment: $41 to $1,775

Grace period: 0 days

Application fee: $0

Loan Details
  • More than $19 billion loans funded
  • Join America's first personal loan marketplace with over 1 million members
  • Next Day Funding - In as Little as One Business Day**
  • Get fixed monthly payments with no prepayment penalties
Disclosure

Prosper advises you may not qualify for a personal loan if your credit score is below 660. However, you can check your eligibility and rate without affecting your credit score through Prosper's preapproval process.

What Are the Benefits of a Debt Consolidation Loan?

Managing multiple debt accounts can be challenging and even overwhelming. A debt consolidation loan could simplify your budget and even save you money on monthly payments. Here's a look at how you might benefit from a debt consolidation loan.

Streamlines Your Finances

One of the main advantages of a debt consolidation loan is that it can eliminate the task of paying multiple lenders each month. When you consolidate all your existing debt into one new loan, you only have to make payments to your new lender or lending platform. Making only one payment is not only easier, but it can save you from dealing with late and missed payments—which can occur when juggling multiple payments each month.

May Save Money

Another advantage of a debt consolidation loan is the ability to lower the amount of interest you're paying on your outstanding debt. People typically use debt consolidation loans to pay off their high-interest debt—like credit card debt, which averages 20.92% APR in the U.S. and can run much higher. Depending on your creditworthiness, a debt consolidation loan will have a much lower interest rate, which can save you money on interest over the life of your loan and even lower your monthly payment.

Can Accelerate Your Debt Payoff Timeline

Unlike credit cards and other types of revolving credit, personal loans have a fixed repayment schedule with a definitive date when the debt will be paid off. If you can swing the higher payments, you could apply for a short-term consolidation loan with a term length of just a few months. Not only would you zero out your debt fast, but you could also save money on interest.

Can Potentially Help You Improve Credit

Payment history is the most important factor in calculating your credit score—accounting for 35% of your FICO® Score—and it is important to avoid missing any loan payments. Using autopay or setting up automatic notifications that alert you that your loan payment is due can help make sure you don't miss a payment.

How to Qualify for a Debt Consolidation Loan

Qualifying for a debt consolidation loan with poor credit can be challenging, but your credit is only one of the factors lenders consider when reviewing your loan application. Here are the most common debt consolidation loan requirements for this type of personal loan:

  • Strong credit: A credit score of at least 670 improves the likelihood of loan approval with attractive interest rates. If your credit is less than stellar, consider adding a cosigner or working with an online lender or credit union with more flexible eligibility criteria.
  • Solid history of on-time payments: Lenders review credit reports to see how you've managed your credit and if you've made timely payments on your debt accounts. A credit history that includes several late or missed payments can severely lower your credit score.
  • Sufficient income: Lenders and lending platforms must be able to see you have enough income to repay the loan, and many set minimum annual income requirements. For example, LendingPoint personal loans require at least $35,000 in annual income from employment, retirement or elsewhere, while Upstart's minimum income requirement is only $12,000.
  • Low debt-to-income-ratio: One way lenders determine if you can take on a new loan is by considering your debt-to-income ratio (DTI). This ratio compares how much of your gross monthly income goes toward your total monthly debt payments. Lenders typically prefer a DTI below 36%, but some will approve borrowers with higher ratios.
  • May require collateral: Most personal loans don't require collateral, but secured loans do, typically something of value like cash savings or a car. Since secured loans pose less risk to a lender, qualification may be easier and your interest rate may be lower. But be aware you could lose your collateral if you fail to keep up with payments.

Alternatives to Debt Consolidation

While debt consolidation loans can be beneficial, they're not your only option. Before proceeding, consider other alternatives to pay down your debt, such as:

New Budget

Making a budget and tracking your expenses is crucial to determining how much you can afford to pay toward existing debt each month. With a workable budget, you can set aside a set amount toward your debt payments and inch toward your goal of eliminating your debt. If you don't have a budget or your current one doesn't allow you to put more toward your debts, create a new one.

Credit Card Balance Transfer

If you have good credit, you may save substantially on interest by transferring your high-interest credit card balances to a card with a lower interest rate or a promotional 0% APR period. Some cards offer introductory periods of up to 21 months, allowing you plenty of time to pay down debt interest-free.

Home Equity Loan or HELOC

If you have a home with equity, you could pull out a portion of it to pay off debt through a home equity loan or home equity line of credit (HELOC). Home equity loans offer a lump-sum payment you must repay over five to 30 years at a fixed interest rate. By contrast, a HELOC gives you an open line of credit you can draw from multiple times as needed up to your credit limit.

Debt Repayment Strategies

A good debt reduction plan can provide a roadmap to eliminating debt and help you track your progress. The most common repayment strategies are the debt avalanche and debt snowball methods. In both cases, the idea is to make minimum payments on all your debt payments but prioritize one account with higher payments. The debt avalanche method has you focus on paying off the account with the highest interest rates first and repeat the process until your debts are paid off. This strategy can help you save money in interest charges over time. Conversely, the debt snowball method prioritizes paying off your accounts with the lowest balances to create quick wins and build momentum.

Credit Counseling

If you are overwhelmed with debt and need help finding a way to pay it off, credit counseling may help. A nonprofit credit counselor can work with you to strategize debt payoff and may recommend a debt management plan (DMP). With a DMP, your credit counselor helps you determine how much you can put toward your debt each month and attempts to negotiate reduced interest rates fees with your creditors. You make one payment to the credit counselor, who then distributes it to your lenders until your debts are paid off.

Improve Your Credit—and Your Options

While you may qualify for a debt consolidation loan with bad credit, you'll likely pay more in interest rates. By taking a few months to improve your credit, you could boost your odds of approval for debt consolidation loans and other types of credit and with lower interest rates. Even reducing your interest rate by a point or two could save you hundreds or even thousands of dollars over the life of the loan.

Consider reviewing your credit report and credit score for free with Experian. Once you have a clear picture of your current credit profile, you'll better understand what improvements you must make to achieve a good or excellent credit score.

Personal Loan Calculator

The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.

Learn More About Debt Consolidation With Bad Credit