If you have a lot of debt or different types of debt, then a debt consolidation loan might sound like a good idea. However, your options may be more limited when it comes to getting a loan with bad credit.
While you may have less options, the good news is you can still get a debt consolidation loan, even with bad credit.
This article will detail the ins and outs of a debt consolidation loan, the pros and cons of getting one, and what your alternatives are if you aren’t ready to get a debt consolidation loan.
What is a Debt Consolidation Loan?
A debt consolidation loan is a new loan taken out to cover the balance of your other loans. A debt consolidation loan is a single, larger piece of debt, usually with better payoff terms than your original, smaller debts. When you receive a consolidation loan, your other loan balances are paid off. This allows you to make one monthly payment rather than multiple payments.
For example, if you had one student loan for each semester of your four-year college degree, then you’d have taken out eight loans. This can be cumbersome to manage, so you could take out a debt consolidation loan to pay off all your eight loans and only make one monthly payment instead.
Get A Debt Consolidation Loan with Bad or Average Credit
If you have poor or average credit, then it might be difficult for you to get approved for a consolidation loan or to get a loan with favorable terms. A bad or average credit score is typically anything under 670. In this case, you will need to take steps to get a debt consolidation loan for bad credit.
Step 1: Understand Your Credit Score
The first step toward getting a personal loan or a consolidation loan is to understand your financial standing. Your credit score is one of the main factors that a lender will evaluate when deciding to give you a debt consolidation loan. Therefore, take the time to look up your credit score and what events have impacted your score. Sometimes, years of bad habits contribute to a low score.
Continue to monitor your score over time. You can learn what contributes to a good score as well as what causes your score to decline, and act accordingly. You can also actively take steps to improve your credit score.
Step 2: Shop Around for a Debt Consolidation Loan
If you have a poor credit score, you might be inclined to take the first loan offered to you. However, you may have multiple options for lenders to work with, so be sure to shop around for a good interest rate and term. You might want to investigate online lenders as well as brick and mortar lenders like your local credit union.
Be sure to carefully review all the fees associated with taking out a personal loan. This might include an origination fee or a penalty for paying back your loan early. Understanding your fees can save you hundreds of dollars over the life of your loan.
Step 3: Consider a Secured Loan
Most personal loans used for debt consolidation are unsecured loans. This means that they do not require collateral. However, if you’re having a tough time getting approved for a loan, you might want to consider a secured loan.
Forms of collateral include a vehicle, home, or another asset. The collateral must be worth the amount of the loan if you default on the loan. Even if you can qualify for an unsecured loan, you may want to compare the interest rates of a secured loan to see if you can get a better rate.
However, make sure you will be able to pay back the loan before offering assets such as your vehicle or your home. With a secured loan, if you default you could end up losing whatever asset you used as collateral.
Step 4: Improve Your Credit Score
Finally, if you can’t get a loan right away, you may want to take some time to evaluate your credit score and see where your areas of opportunity lie. If you have small glitches on your score that caused it to decrease significantly, then you might be able to raise your score quickly.
For example, one missed payment or forgotten bill can cause your score to plummet. If this is the case, you may be able to pay off that small bill and raise your credit score quickly.
How to Qualify for a Debt Consolidation Loan
To get a debt consolidation loan, you must be 18 years or older and a legal U.S. resident. You must also have a bank account and not be in bankruptcy or foreclosure. These are the basics of qualifying for a debt consolidation loan.
In addition to these basics, you’ll want to try to improve your financial standing as much as possible. Borrowers with good or excellent credit and a low debt-to-income ratio typically have no problem getting a debt consolidation loan. However, if you have bad credit, you will want to work to improve your credit score and decrease your debt-to-income ratio.
If you have bad credit and are considering a debt consolidation loan, you might already be in a financial rut. This can make it difficult to improve your financial standing. If this is the case, you can search for lenders that specialize in helping people with bad or average credit and be sure to shop around for the best rates and terms that you can get.
Personal Loans for Debt Consolidation
If you have poor credit and need a personal loan, you may want to check out these providers. They will offer high-interest loans to people with poor credit.
Fiona is an online marketplace that connects potential borrowers with multiple lenders. Borrowers simply fill out a quick application, and they are matched with the lenders most likely to approve them. This saves time and money, as you can be matched with a lender without needing to visit a bunch of sites.
Fiona is ideal for borrowers with a 580 credit score or higher, and that doesn’t want to have to waste time filling out a bunch of applications. A nice feature of Fiona is their initial application requires just a soft credit check, so making a quick application won’t hurt your credit score.
Since Fiona is a marketplace and not a direct lender, the terms of offers and the number of offers borrowers receive may vary. Some borrowers report being bombarded with offers, which we feel is potentially a benefit as multiple offers help ensure you get the best deal.
Lending Point will typically lend up to $25,000 with an interest rate of 15.89% to 35.99% APR and a 36-month term. You can check your rate for free on their website. If you qualify, you can receive your personal loan in as little as 24 hours. LendingPoint takes your credit score, job history, and income into consideration when you apply for a loan.
SoFi will lend up to $100,000 with an interest rate of up to 17% on a 24-month term. There are no origination fees or early payment penalties and no overdraft fees. You can apply online for free and will typically receive your funds in a few days.
Upstart will lend up to $50,000 with an interest rate of 7% to 35.99% on a 36 or 60-month term. Funds are provided as early as the day after approval, but they have a high origination fee of 8%.
OneMain will lend up to $20,000 with an interest rate of between 18% and 35.99% on a 24 to 60-month term. They do have small origination fees and late payment fees, but they typically range up to $30 per payment. You can apply for a loan online and have it funded as early as a day after you apply. The company also has almost 1,500 branches across the country for those who prefer to apply for a loan in-person.
Should I Get A Debt Consolidation Loan?
If you’re in a pinch and need to consolidate your loans to make them more manageable, then your best option may be to get a personal loan or a debt consolidation loan.
There are plenty of benefits of a debt consolidation loan. Some of them are:
- Simplified finances. When you consolidate your debt, you will pay off multiple debts and only have one loan. This means you’ll make one monthly payment instead of having to track multiple payments.
- Lower interest rates. If you have a bunch of credit cards or other high-interest debt, the interest rates might vary and be high. Personal loans typically have lower interest rates depending on your credit score, the loan amount, and term length.
- Fixed repayment schedule. Instead of having multiple payments each month that vary by amount, interest rate, and term, you will have a fixed schedule each month.
- Boost your credit. By eliminating the risk of forgetting to make payments or letting your loans get away from you, paying a set amount on a consolidated loan can help you to boost your credit score.
Debt consolidation isn’t for everyone. Be sure that you understand the risks you take on as well. Some of the things to watch out for include:
- Upfront costs. Some personal loans have upfront fees, including an origination fee, closing costs, or annual fees. If you pay a lot of fees over time, it might not be beneficial to consolidate your loans.
- Higher interest rates. If you have poor credit, you will not get a favorable interest rate on your consolidated loan. Therefore, you may have a higher interest rate on your consolidated loan than on your existing loans. If this is the case, it likely will not make sense to consolidate.
The Bottom Line
Having poor credit does not mean that you can’t get a debt consolidation loan. However, it might be more difficult for you to get a loan right away or to get one at a favorable rate. If you decide to apply for a debt consolidation loan, be sure to shop around for the best rates and do your best to improve your credit score before applying.
This article originally appeared on Wealth of Geeks and has been republished with permission.
Tawnya is an elementary special education teacher by day and co-blogger at Money Saved is Money Earned by night.
She holds an Honors BS in Psychology from Oregon State University and an MS in Special Education from Portland State University. She has had a pretty successful writing career, first as a writing tutor at the Oregon State University Writing Center, and in recent years, as a freelance writer.
Tawnya and co-blogger Sebastian have a wealth of knowledge and information about personal finance, retirement, student loans, credit cards, and many other financial topics. They teach people how to save money, make money, and understand money.