Managing multiple debts like credit cards, personal loans, and other liabilities can be stressful. Debt consolidation can help you combine all your debts into a single, affordable payment each month. 

If you have bad credit, accessing consolidation loans may be difficult. Read on to learn how to qualify for consolidation loans with bad credit, the types of loans available, and factors to consider.

What Are Debt Consolidation Loans for Bad Credit?

Debt consolidation loans combine all of your current debts into a single debt with monthly payments and, ideally, a lower interest rate. Some lenders offer bad credit loans that are easier to qualify for, so you may be able to access these even with a lower credit score. 

Let's understand how it works with an example. 

Mike is employed and uses three credit cards with a total outstanding credit card debt of $20,000. His average annual interest rate is 20% for each card. He’ll have to make a payment of $1,852 if he wants to pay off his debt in 12 months.

If Mike takes a debt consolidation loan with a lower interest rate of 11% for 12 months, his monthly payment will be $1,767. He’ll save $1,020 over a year.  

How To Qualify for Consolidation Loans with Bad Credit

In general, accessibility to a debt consolidation loan is dependent on your creditworthiness and income standards. Generally, you must have a credit score of 670 or higher to qualify for a debt consolidation loan.

Here are a few things you can do to increase your chances of qualifying for a consolidation loan with bad credit:

Start by checking your credit score online. Knowing your credit profile will make it easier to evaluate your options and find lenders that are the right fit. 

Do your research and compare loan options from credit unions, banks, and online lenders. While it may take time, it can help you save hundreds of dollars in interest.

Pay down one or more of your existing debts to improve your debt-to-income ratio. In addition to your credit score, lenders will also look at your DTI ratio, which should ideally be no more than 35%, when evaluating your loan application. 

Apply for secured loans for bad credit, which are easier to qualify for.

If you’re a member of a credit union, apply for a loan with them since they usually have lower interest rates and easier qualification requirements. 

Consider adding a family member/friend with a good credit score as a co-signer. 

If you can, apply for a loan after you’ve improved your credit score to get competitive rates. 

Tip: Apply for pre-qualification, which is a soft credit inquiry to check your credit score. An easy way to do this is to check your FICO credit score with online lenders to know if you have bad credit. It will not affect your credit score, unlike a hard credit inquiry made by financial institutions when they process your loan application.  

Why Borrow Debt Consolidation Loans for Bad Credit

Here are a few advantages of debt consolidation loans:

Lower Interest Rates

When compared to credit cards, consolidation loans for bad credit have lower interest rates. The current average interest rate on credit cards is 27.92%.

The average personal loan interest rate is 21.14% for borrowers with bad credit (300-629). 

Financial and Mental Peace

Managing and paying different debt accounts each month can be a daunting task. Debt consolidation loans help bring all of it in one place, and all you have to worry about is making that one debt payment on the due date every month. 

Can Help Improve Credit Score

As you repay your debts with this new loan, they will be marked as paid on your credit reports. This will reduce your liabilities and also improve your credit score. 

Factors To Consider Before Consolidating Loans With Bad Credit

  • Do not use debt consolidation loans for small loan amounts. Something you can pay off within a year without financial distress is not apt for taking these loans. 
  • Ask for interest rate disclosure from lenders. Some companies offer attractive interest rates for a short period and only to a few borrowers.
  • Compare different lenders for annual percentage rates over the repayment term of your debt consolidation loan to ensure you’re not paying higher interest rates. Also, keep an eye out for origination fees.
  • Negotiate with your current lenders on loan terms for a lower interest rate. 
  • Ensure you have a steady source of income to handle the monthly payments before you borrow.
  • Once you borrow a loan, set up autopay to avoid any late fees. 
  • If you have a bad credit score, wait and try to improve it. It will help you get a lower interest rate on the loan amount.

Different Types of Debt Consolidation Loans With Bad Credit

When consolidating debts, there are several different options to choose from. 

Debt Consolidation Loans

Some companies offer bad credit loans specially designed for consolidation. Usually, the lender closes your consolidated debts with previous lenders on your behalf. If you have poor credit, you can apply with a co-signer to support your loan application. 

Personal Loans

You can also use personal loans for bad credit to consolidate your debts. The interest rates you qualify for will depend on your credit score. You’ll have a fixed monthly payment and repayment term.  

Once you receive the loan funds in your bank account, you can use them to pay off your current debts. You’ll then have a single payment each month.

Balance Transfer Credit Cards

Some lenders offer BT credit cards that allow you to consolidate the outstanding credit card debt of all your cards into one. 

The good part with this plan is that the lender usually pays your outstanding credit card balances, and you don't have to do it individually. Borrowers with excellent credit may also qualify for a 0% APR promotional offer for an introductory period. 

Home Equity Loan

You can apply for a bad credit home equity loan if you have at least 15% equity in your home. Keep in mind that your home is collateral for equity loans. This means that if you fail to repay the loan, you risk foreclosure. 

Alternatives to Consolidation Loans

If none of the options listed above work for you, there are other alternatives to consider. 

Home Equity Lines of Credit

Also called HELOC, these are similar to home equity but you do not get funds as a lump sum. Instead, you'll have access to a credit line to use and can repay the money as you go. Weigh the pros and cons to determine if HELOC will be a good idea for you.

401(k) Loans

You can use 401(k) loans to borrow money from your retirement account, as interest and fees tend to be lower. However, loan terms may allow you to borrow only half of your vested amount and keep your job unless you repay this loan in full.  

Secured Loans

If you have an asset, like a vehicle, gold, or real estate, you can use a secured loan to pay off debts. Secured loans also usually have lower rates compared to unsecured loans. However, it poses a risk to your assets if you fail to repay the loan. 

Weigh Your Options When Borrowing Consolidation Loans With Bad Credit

While you’ll likely pay high interest rates when borrowing consolidation loans with bad credit, there are several options available. Pre-qualify with at least three lenders to compare the rates and find the best debt consolidation loans. 

If you have overwhelming debt and are finding it difficult to keep up with payments, consider other debt relief programs like debt settlement, debt management plans, or credit counseling.