There are options for getting debt consolidation loans with bad credit, including unsecured personal loans, secured personal loans, home equity products and credit cards. Ideally, a debt consolidation loan allows the borrower to save money in the long run by combining all debts at a lower APR. Interest then accrues less quickly, which lets the borrower get debt-free sooner.
Unfortunately, debt consolidation is difficult with bad credit. There are far fewer offers available, for one thing. Plus, people with bad credit scores are likely to qualify only for rates at or near the lender’s maximum. Therefore, it’s very possible that an applicant will not receive a lower APR on the new loan or credit card than they are currently paying on their existing debts. That defeats the entire purpose of debt consolidation, unless the borrower wishes to consolidate simply to combine all their payments into one for simplicity or to lengthen the amount of time they have to pay the loan off.
Personal loans available to people with bad credit can also have costly origination fees, and applicants will have a hard time qualifying for a loan above the lender’s minimum amount (usually $1,000 to $5,000 for personal loans). Similarly, with credit cards, it’s hard to get a credit limit of more than a few hundred dollars with bad credit. That makes it impossible to consolidate larger debts on a card.
Below, you can learn more about how to consolidate debt with bad credit, along with the benefits and drawbacks of various methods.
How to Consolidate Debt with Bad Credit
- Pick the best method for you. A personal loan (either unsecured or secured) , a home equity loan or line of credit, or a credit card may work best, depending on how bad your credit is and how willing you are to put up collateral.
- Try to pre-qualify. Depending on the type of debt consolidation option you choose, you may or may not be able to pre-qualify and see your potential rates ahead of time. You can pre-qualify for a personal loan on WalletHub, and you might be able to check for pre-qualification on a credit card issuer’s website. Unfortunately, you can’t pre-qualify for home equity products.
- Apply for the loan or credit card. Submitting an application involves putting down personal details (such as your address and Social Security number) and financial details (such as your income, employment status and monthly housing payment).
- Wait for approval. Decisions on personal loan applications usually take at least a few business days. Some credit cards may offer instant approval, but the process can also take weeks. And home equity products often take over a month.
- Receive the funds. If you’re approved, it can take a few additional business days to receive your money. With a credit card, you can request a balance transfer either on the application or after you receive the card in the mail.
- Use the money to pay off old debts. If you do a balance transfer to a credit card, the card’s issuer will pay off the old debts, moving them to the card. A few personal loan providers will pay off old lenders directly, but most other loans and lines of credit require you to pay off your original debts yourself. Once you do so, the debts will be “consolidated” in one place with the new loan or credit card.
Now that you know the general process for consolidating debt with bad credit, the next step is to determine which type of debt consolidation loan or credit card is best for you.
Ways to Consolidate Debt with Bad Credit Compared
|Consolidation Method||Unsecured Personal Loan||Secured Personal Loan||Home Equity Loan||Home Equity Line of Credit||Credit Card|
|Credit Score Required||585+||No minimum||620+||620+||No minimum|
|Dollar Amount Available||$1,000 - $100,000||$1,000 - $100,000||Based on your equity amount||Based on your equity amount||Less than $1,000, usually|
|Standard APRs||6% - 36%||6% - 36%||4% - 8%||4% - 8%||10% - 35%|
|Collateral Required||None||Bank account, vehicle, stocks, etc.||Your house||Your house||None|
Unsecured personal loan: Several personal loan providers accept applicants with bad credit. However, all of them are toward the upper end of the bad credit range. The easiest option, LendingPoint, requires a score of 585.
The problem is that even you can get approved with bad credit, you can often expect APRs above 30%. In addition, it will be difficult to get a loan amount higher than $1,000 - $5,000. So unless you’re consolidating small, extremely expensive debts like payday loans, an unsecured personal loan might not work. Also keep in mind that personal loans may charge origination fees to open the account, which may add another 1% to 8% on top of the total debt you already owe.
Secured personal loan: Secured personal loans have relaxed credit score requirements because they require collateral. There’s very little risk for the lender as a result. If you don’t pay the loan back, they can take possession of the collateral. You’re also likely to get lower APRs on a secured personal loan than an unsecured personal loan. In addition, valuable collateral can get you bigger loans.
Home equity loan: A home equity loan lets you borrow a lump sum of money secured by your house. You’ll have up to 30 years to pay the money back in some cases, and the APRs are extremely low (4% to 8%).
Unfortunately, home equity loans usually require a credit score of 620+, though a score of 700+ will give you the best odds. If you have an especially valuable house with a lot of equity, you might have a shot at approval even with bad credit.
Home equity line of credit: A HELOC is basically a home equity loan that functions like a credit card. You have a certain credit limit based on your equity, and you can withdraw up to that amount of money any time during the line of credit’s “draw period.” You’ll only need to make monthly payments on what you choose to borrow. HELOCs have the same general requirements as home equity loans.
Credit card: You can consolidate debt by doing a balance transfer to a credit card. The best credit cards for consolidating debt are ones that have introductory 0% APRs on balance transfers. Unfortunately, those cards tend to require good or excellent credit to qualify. With bad credit, you’ll only be able to qualify for expensive unsecured credit cards with low credit limits or secured credit cards that require you to put down a cash security deposit (defeating the purpose).
With bad credit, you can expect credit card APRs of 10% - 35%, along with credit limits of only a few hundred dollars. This option works for consolidating small, costly payday loan debts, but that’s about it.
Debt consolidation loans and credit cards aren’t the only ways to deal with debt when you have bad credit, though. There are several alternatives to consider.
Alternatives to Debt Consolidation Loans for Bad Credit
- Debt settlement: To “settle” your debt, you offer to pay a significant portion to the lender in a lump sum in exchange for the lender forgiving the rest. The lender might accept because they would rather secure some payment immediately than worry about you eventually defaulting.
- Debt management: To “manage” your debt, you negotiate a new payment plan with your lender. That could include reducing your APR, making your monthly payments smaller, temporarily allowing you to skip payments, or another strategy to make it easier for you to pay. A lender may be more likely to accept this plan if you can demonstrate hardship that’s beyond your control, like illness or sudden unemployment.
- Credit counseling: A reputable credit counseling program will take a detailed look at your finances and figure out the most efficient way for you to pay off your debt. Some programs charge a monthly fee for their services, but some non-profit credit counseling programs are free, so try to avoid ones that cost money.
- Bankruptcy: If you truly cannot find any way to consolidate, settle or otherwise get rid of your debt, you might consider filing for bankruptcy. But this should be your very last resort, as it will severely hurt your credit standing for years to come.