How to Get a Debt Consolidation Loan with Bad Credit

Bad credit can be debilitating—and when you’re looking for options to get out of debt, it’s hard to find lenders that can help. A debt consolidation loan can simplify your finances, but qualifying for this type of loan can be tricky.

If you’re in this situation, you need to know what you can do and where to go for help. There are some moves you can make to put yourself in a better position for getting that loan.

How to get a debt consolidation loan with bad credit in 5 steps

You might be wondering what exactly is considered a “bad” credit score and how it will affect your chances for a debt consolidation loan. The Fair Isaac Corporation (FICO) has a specific credit range for what they consider poor credit, which is a score lower than 580. If your score is between 580 and 669, you have what is considered a “fair” credit score. The higher your score, the less risky you seem to lenders and the more likely you are to get approved for a loan.

Getting approved for a debt consolidation loan when your credit score is lower than 580 is possible, but you need to be careful. Some deals could leave you with an interest rate and fees that are higher than you’re currently paying.

When you’re ready to get a debt consolidation loan, take these five steps to find the best one.

1. Check your credit

Knowing your credit score ahead of time can help you understand the rates that are fair for your credit level. Recent changes mean that you are now allowed a free credit report every week from each of the three major credit bureaus.Get them online via AnnualCreditReport.com. You can also often get a credit score for free from your credit card issuer or bank.

2. See what you qualify for

Since getting your finances under control is a priority, you may want to see what you currently qualify for rather than wait for your credit score to improve. Many lenders have the option of a soft credit check, which can show you what you’ll qualify for without affecting your credit.

Make sure to shop around for lenders to see what each offers. One of the keys to getting a debt consolidation loan is to look for lenders that specialize in borrowers with less-than-perfect credit. Credit unions and some online lenders can be a good place to start.

3. Check your rate

Many lenders offer borrowers the ability to prequalify for a loan before a hard credit check. Borrowers can see the amount and annual percentage rate (APR) they’d likely be offered. Use that opportunity to identify lenders and learn the range of offers that might be possible.

4. Request quotes and compare options

Once you know what options you have for a debt consolidation loan, it’s time to apply and see what you’re offered. Compare the rates, fees, terms, and payments from the lenders from which you requested quotes.

RELATED: Best Personal Loans for Bad Credit

5. Choose a lender

Once you have compared all options it’s time to choose a lender that has the most favorable terms and rate, make a payoff plan, and stick to it.

Need a few ideas for debt consolidation loan providers? Below are a few options. If you’re borrowing and have bad credit, assume that you’ll be offered loans at the high end of the APR range. Note that the high end from the three lenders listed below ranges from 17.99% to 35.99%.

What are the benefits of a debt consolidation loan?

With debt consolidation, there are three main benefits:

• Lower, fixed interest rate.
• Simplified finances.
• Faster payoff.

With a lower interest rate and a single payment, it’s much easier to get debts under control. Making your finances easier and cheaper can go a long way toward a financially secure life.

How to qualify for a debt consolidation loan

Qualifying for a debt consolidation loan could present a challenge. Lenders love high credit scores, but if your credit utilization ratio is high from a number of debts, then your credit score will likely be very low. In order to increase your chances of qualifying consider the following:

• Check your debt-to-income level. No matter what credit score you have, if you have too much debt, you may not have enough income to qualify for another loan.
• Check your credit score. The higher you can get it, the better luck you’ll have finding a lender for a debt consolidation loan.
• Wait until your credit score is higher. If at first you aren’t approved for a loan, start keeping track of your credit score and learn what you can do to improve it.
• Increase your income. More income can help you qualify for loans and pay down those loans.
• Set up autopayments. If you want your credit score to improve, you’ll want a rock-solid history. By putting your bills on autopay, you can be certain they are always paid on time.
• Consider a cosigner. A cosigner is a trusted family member or friend that agrees to be responsible for the loan if you cannot repay it. Their credit score and income can be used to help you qualify for the loan–just be careful going down this path as there are a lot of potential problems down the road.

Alternatives to debt consolidation

Debt consolidation may not be the best option for your situation. There are some alternatives to paying off debt you may want to consider, including:

• Balance transfer credit card. A credit card with a 0% balance transfer may offer you some relief from interest costs for a short time.

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• Debt management plans. You may be able to work with a credit counseling agency, which may be able to negotiate lower interest rates or payments on your behalf. However, you cannot open any new accounts during this time.

• Debt settlement. Depending on what debt you have, you may be able to settle debts. The Consumer Financial Protection Bureau (CFPB), however, warns against working with companies that promise your debts can be settled for pennies on the dollar or encourage you to ignore creditors.

• Home equity loan or home equity line of credit (HELOC). If you own a home and have built equity in it, it’s possible to take that out of your home to consolidate your debts. A home equity loan, for example,could have a lower payment with a longer term.

• 401(k) loan: It is possible to borrow against the amount in your 401(k) to consolidate your debts.

• Bankruptcy. If your debt situation is uncontrollable, you may want to look at bankruptcy.

TIME Stamp: With high interest rates for bad credit, do the math before consolidating debt

Debt consolidation loans can help simplify your finances with a single payment. However, with bad credit, it may be tough to find a lender. A debt consolidation loan with harsh terms may not make sense for your finances, either.

Some lenders specialize in lending to borrowers with poor credit. But even then, you may not qualify for a loan. There are ways to improve your credit before applying to increase your chances of approval.

Frequently asked questions (FAQs)

What credit score is needed for a debt consolidation loan?

The credit score required for approval varies by lender. Of course, the higher the score, the better your chance of being approved and getting more favorable loan terms. It’ll be easier the sooner you make moves to improve your credit score.

Can I get a debt consolidation loan with a 400 credit score?

It’s very difficult for a borrower with a credit score below 579 to get approved for a debt consolidation loan. Lenders take on a lot of risk with lower credit score borrowers. You may have to put up collateral, pay high fees, or increase your credit score to get a debt consolidation loan.

Is it hard to get approved for debt consolidation?

Debt consolidation loans are personal loans and have a higher bar for qualification than loans made with collateral (like HELOCs). You may want to try specialized lenders or local credit unions that may have more flexible credit requirements.

Are debt consolidation loans bad for your credit?

The initial credit inquiry from the application for a personal loan may temporarily lower your credit score by five to 10 points. However, paying off multiple credit lines that may have pushed the credit utilization ratio above 30% and replacing those debts with a single installment loan could actually increase your credit score. And once you have the loan—ss with other installment loans—paying on time, every time,will build your credit. A debt consolidation loan could actually help you improve your credit score in two ways.