If You Have Bad Credit, Can You Qualify for a Debt Consolidation Loan?
The more debt you have, the harder it is to keep up with repayments. Late payments can lower your credit score, which can make borrowing more expensive in the future. So what’s the path out of this repayment nightmare?
One possibility is a debt consolidation loan. A debt consolidation loan allows you to borrow one big loan to pay off some or all of your smaller ones. The incentive is having to make only one payment every month, and hopefully at a lower interest rate! But if you already have a poor credit score, is debt consolidation even an option? It’s possible, but the rates may not be ideal, so you’ll want to research all your options including debt settlement and debt relief.
What is a debt consolidation loan?
A debt consolidation loan is a type of loan you take out to turn multiple debts into one debt. You add up all of the debts you want to consolidate into one larger loan amount, then take out the new loan and use those funds to pay off your old debts. You’ll be making one set of payments instead of multiple loan payments.
Ideally, this new loan will have a lower rate than the original loan or come with lower monthly payments. The best debt consolidation loans offer both. However, you'll likely have to choose between lower monthly payments and paying more in interest overall—even with lower rates.
A longer term on a loan can mean lower payments, while a shorter term can mean less total interest, which means you’ll pay less over time. It's really about what's right for you and your ability to make on-time payments.
If a debt consolidation loan has a higher interest rate than your current debts or unaffordable monthly payments, it may be a mistake to take out the loan. While simplifying your debts is a good thing, paying more money is not.
Can you get a debt consolidation loan if you have bad credit?
Getting a debt consolidation loan if you have bad credit is like acquiring any other loan if you have bad credit. Traditional lenders may not lend to you at all and if they do, the loan offer rates may be so high that it isn't worth it. The loans or credit cards that you took out before you had a bad credit score may have better repayment terms than anything you're able to qualify for right now.
If you have multiple payday loans that you are struggling to pay, consolidating all of those loans into a single bad credit installment loan with longer loan terms and lower payments may be a way to stabilize your finances.
If you’re considering a debt consolidation loan, do your research. Compare different loans’ annual percentage rates (APRs) to determine which one is most affordable. Read all of the fine print before signing anything. Check the monthly payment amounts against your budget and see if you'll be able to afford them. Online reviews can also help you determine which lender is the right choice for you.
Bad credit debt consolidation loan options
There are different types of debt consolidation loans you can consider depending on your needs.
Secured loans
Secured loans require collateral that lenders can seize if the borrower doesn’t make all of their payments by the due date. While this can allow you to qualify for more competitive loan rates, you need to be careful about what you offer as collateral. For example, you could consider a home equity loan to consolidate your unsecured debt, but if you fail to make on-time payments you could lose your home.
Credit unions
Credit unions are nonprofit financial institutions owned by their members. Even if you have a less than ideal credit history, you may be able to join a credit union as long as you have a decent history with bank accounts. If you can join a credit union or are already a member, you may be able to qualify for a debt consolidation loan with decent payment terms.
Consider a co-signer
If you have a friend or family member with good credit, consider asking them to be a co-signer on a loan application or a balance transfer card. This could help qualify for rates your FICO score wouldn’t allow you to.
Ideally, you should look for a debt consolidation loan with affordable terms that will report your on-time payments to the credit bureaus. This will allow you to handle your debt and build your credit score back up as well.
Debt consolidation can help or hurt your credit score
Your credit score is calculated by the three major credit bureaus (Experian, Equifax, and TransUnion) using information gathered in your credit report.
Your payment history and the amount of debt you owe are the two most important parts of your credit score. Both can be negatively affected if you’re struggling with multiple debts. The more outstanding debt you have, the bigger the impact. Additionally, dealing with multiple high interest loan payments every month may increase the chance you’ll be late or miss payments entirely, which could damage your payment history and lower your credit score.
If a debt consolidation loan can help you pay down your debt and make those payments on time, then it can benefit your credit score. You could even set up autopay to help you avoid missing payments.
Finally, if debt consolidation loan applications require a hard credit check, it can cause a short-term negative mark on your report. This is a relatively minor factor, but it can add up quickly if you’re submitting multiple applications that require hard inquiries.
Alternatives to debt consolidation loans
If you don’t have the minimum credit score to qualify for a debt consolidation loan or the options available to you aren’t worth it, there are other options to consider.
Credit counselors
Nonprofit credit counseling agencies can help you make a plan to manage your debt and may be able to work out a better payment plan with your creditors.
Debt settlement
You can attempt to negotiate a debt settlement agreement directly with your creditors or via a debt settlement company. Before choosing to work with a debt settlement company, you should do your research, and consider the risks and costs involved. While debt settlement can reduce the amount you'll have to pay, it’s not without its downsides. Settling your debt is better than not paying it, but it may cause a negative impact on your credit report. It could also have tax implications. Many healthcare providers may be open to receiving a portion of your medical bill debt if you can’t cover the full cost. It doesn’t hurt to ask.
Debt relief
It’s worth doing some research to find out if you may qualify for debt relief from either the government or non-profit organizations. Mortgages and student loans have associated government programs that can provide assistance, especially if you’ve faced hardship.
Turn to friends and family
In addition to asking a friend or family member to be a co-signer, you could see if they’re willing to lend or gift you money to cover your outstanding debts. But be careful that it doesn’t negatively affect your relationship. Consider the steps you can take to make the arrangement work for everyone, including filling out a contract to make it official, so there are less likely to be hard feelings.
The Bottom Line
Having a bad credit score is always going to be tougher than having a good or average one. It’s possible a debt consolidation loan may help, but you always should do your research and carefully weigh the pros and cons before making any decisions.