How to Get a Debt Consolidation Loan With Bad Credit

Debt tends to pile up, whether because of bad choices or life happening. It can be credit card debt, student loan debt, unsecured loan debt, or any other form of borrowing you’ve chosen to engage in over the years. Regardless of the source, compiling debt from multiple lenders may have you in a bind with no clear path out. According to the Federal Reserve, Americans had nearly $4.2 trillion in outstanding debt at the end of 2019.

In the U.S., national credit bureaus like Experian and Equifax rate borrowers on a scale from 300 to 850 based on how well you’ve proven your ability to make good on your debts and financial promises. Scores 580 and above are considered to be fair, while anything 579 or below is considered to be bad credit. Getting debt consolidation loans with bad credit may be challenging, but there is hope.

Having bad credit can limit your ability to take out loans to buy a house, get a new car, remodel or reach your financial goals. One of the largest factors weighed in calculating your credit score is your outstanding debt. Debt consolidation may be a viable option for you to begin the road to recovery for your finances, your credit score, and your creditworthiness.

Pros of a debt consolidation loan

• Simplicity and efficiency through eliminating the need to pay multiple lenders
• Can secure a lower overall interest rate saving you money
• May help you to recover your subpar credit score

Cons of a debt consolidation loan

• Can be more expensive than your existing rates
• Might be confused with debt settlement programs that can ruin your credit
• May have high fees

What is a debt consolidation loan?

Debt consolidation loans are brand new loans you take out to pay off all or some of your existing loans. For example, let’s say you owe $10 to company A, $15 to company B, and $8 to company C, each at a 10% interest rate. A debt consolidation company could write you a new loan for $33 ($10 + $15 + $8) at a lower rate of say, 8%. You then take the $33 and pay off your loans with company A, B, and C, and now only owe money to the debt consolidation company at a lower rate. Instead of needing to make three payments every month at 10%, you only have to make one payment monthly at 8%.

Be aware that not all debt consolidation loan companies have the same process. Some companies will pay your other creditors off directly, while others will send you the money to make the payments yourself. It’s imperative if you’re sent the money directly that you immediately take 100% of that money and pay off the loans the funds are designed to cover. Failing to do so or choosing to use some of the funds for other expenses will cause you to rack up more debt, which will just make your situation worse instead of better.

How to get a debt consolidation loan with bad credit

Getting debt consolidation loans with bad credit may be a tall task as creditors are sometimes wary of lending to those who don’t have the best track record. That being said, it does happen, and you should look to see if you qualify. Here are the simple steps to follow.

1. Get an accurate and current picture of your current financial situation. Collect copies of your credit report, information on your outstanding loans and income statements or pay stubs for the last year.
2. Contact several debt consolidation companies and request information on what they’re able to do for your situation. Every financial situation is unique, and the only way you’ll know if you have options is by doing research and applying.
3. Look at all fees and rates to ensure you’re getting a more favorable arrangement. Paying more money just so you don’t have to write more than one check every month is not a fiscally smart move.
4. Choose your best option and create a short-, medium-, and long-term plan for getting out of debt and recovering your credit score. Your debt consolidation company representative should help you refine this process.

What to avoid with debt consolidation loans

While debt consolidation may seem appealing with the potential for simplicity, lower monthly payments, and lower rates, there are things you need to be careful to avoid. First, make sure you’re getting a debt consolidation loan and not agreeing to a debt settlement. Debt settlements are where lenders will advise you to stop making payments on all of your loans and instead make payments into a separate account. After a specific period of time, the lender will contact your creditors and attempt to negotiate to pay off your debt for a lower amount.

Not only does this run the risk of not working and leaving you in a worse situation, but it is also detrimental to your credit. One late payment can drastically bring down your overall score. You can only begin to imagine what several months of no payment on all your loans will do to your creditworthiness.

Will taking out a new loan to consolidate debt have an effect on your credit score? Most likely, yes. The hard inquiry into your credit report will create a temporary drop. Additionally, a new debt account will temporarily bring your score down as it will look like more debt. However, as you start to make on-time payments on your new loan, you’ll recover those points and start to build a more positive credit history.

One of the most critical elements of working with a debt consolidation loan is ensuring you don’t repeat the problem and rack up more debt. After your new loan is approved, your current loans and credit cards will be fully paid off and back to a $0 balance.

Do not look at this as an invitation to start spending again. If you start racking up additional charges, you’ll be doing nothing but making the problem worse. You’ll now owe on the new loan for all your old debt and you’ll have to find a solution to handle your newly acquired debt. If you have to cut up the credit cards or hide them from yourself, do it. Debt consolidation loans can only help if they are coupled with good financial discipline.