Debt Consolidation Loans for Bad Credit

Debt consolidation is the process of combining multiple loans into a single debt and monthly payment. There are two goals behind debt consolidation — to reduce your cumulative monthly payments and reduce the interest rate on your debt. Ideally, you want to save at least a couple hundred dollars per month and have a loan term between 36-60 months (3-5 years).  

By reducing your monthly payments and decreasing your repayment term, you can save thousands in interest charges. Additionally, a debt consolidation loan can give you the financial flexibility needed to save money, build an emergency fund, and pay off other debts, such as your car loan.  

Traditionally, you consolidate debt by borrowing a large lump sum and paying off several of your other obligations. For instance, say you have three credit cards, each with an interest rate above 15%. Cumulatively, your cards have a balance of $10,000. 

In this scenario, you could take out a $10,000 debt consolidation loan (with a lower interest rate and set repayment term) and pay off all three cards. Instead of making three separate payments at a high-interest rate, you could pay one lender and save money. 

By consolidating your debt, you can:

Debt consolidation loans are a great tool for saving money, reducing your interest rate, and getting out of a financial bind. However, taking out a debt consolidation loan with bad credit does involve some risks. As you explore debt consolidation, be wary of the following:

If you want to qualify for a debt consolidation loan with bad credit, focus on the following: 

• Getting your credit score above 670 (if possible) 
• Making payments on time 
• Ensuring you have sufficient income (At least $35K per year in most cases) 
• Decreasing your debt-to-income (DTI) ratio 

If your credit score is poor and you can’t lower your DTI, consider putting up some collateral. Securing funds with a car or your home equity makes lenders less apprehensive when dealing with individuals with bad credit.  

To find the best consolidation loan with bad credit, you should:

The best way to find a debt consolidation loan that works for you is to shop around. Contact multiple credit unions and online lenders to see who offers the sort of products you are looking for.  

Keep in mind that the person you are speaking with will try to convince you to complete an application. If you do, they will run your credit to determine whether you qualify for the loan. While that is not necessarily a bad thing, too many inquiries can damage your credit score and make it even harder to qualify for a debt consolidation loan.  

Once a lender runs your credit, you enter a grace period, which allows you to shop around. While this grace period varies in length, it usually lasts 14 calendar days. From the moment you apply for a debt consolidation loan and have your credit checked, you have two weeks to compare as many options as you want. Whether your credit is run one time or 100 times, you will only be penalized for a single inquiry.  

If you want to avoid a flood of phone calls and emails, do your own research and reach out to a few lenders directly. When you are ready to apply for a debt consolidation loan, have a list of options ready to go so you can efficiently shop around during your grace period. 

Using a debt consolidation loan is relatively simple. It involves the following steps: 

1. Identify your highest-interest debts 
2. Determine how much you need to borrow 
3. Obtain a debt consolidation loan 
4. Pay down on the loan 
5. Use your extra cash to build a savings account 
6. Once you have an emergency fund, pay extra on your loan (or another debt) 

Each time you pay down a debt, roll that extra money toward the next bill you want to eliminate. Repeat this process until you are debt free. 

Not sure which bills to pay down first? If you need help deciding which bills to focus on, consider using the debt avalanche method or debt snowball method. Here is a breakdown of each approach: 

The debt snowball method involves paying off your smallest debt first and then moving on to the next one. For instance, let’s say that you took out a debt consolidation loan and paid off three credit cards. You now have the following debts: 

• A credit card with a $1,000 balance ($100 monthly payment) 
• A debt consolidation loan with a $10,000 balance ($200 monthly payment) 
• An auto loan with a $15,000 balance ($400 monthly payment) 

In this scenario, say that you freed up $200 per month by consolidating your debt. With the debt snowball method, you would apply that extra $200 to the credit card because it has the smallest balance. Instead of paying $100 per month, you would now pay $300 per month.  

When you pay off the credit card, you would then combine that $300 with the $200 you normally pay toward your consolidation loan. Cumulatively, you would pay $500 per month toward the consolidation loan balance. When that is paid off, you turn your attention to the auto loan.  

The debt avalanche method uses the same basic premise as the debt snowball method. When you pay off one debt, you apply the money you were spending on that bill toward the next item on your list. However, the difference is which bills you pay first. 

Whereas the snowball method involves paying the smallest debt first, the avalanche method prioritizes the debt with the highest interest rate. In our example above, let’s say the credit card had an interest rate of 10%, and the debt consolidation loan had an interest rate of 11%. In this scenario, you would pay off the loan first, then the credit card.  

Debt consolidation loans for bad credit are not the only path forward. If you need to shed some debt and lighten your financial burden, consider the following: 

As you can see, there are various options for qualifying for debt consolidation loans for bad credit. However, personal loans often have shorter repayment terms and higher interest rates than secured loans like refinancing a home equity line of credit (HELOC) or a home equity loan.

With that in mind, you may want to consider tapping into the equity in your home so that you can access a lower interest rate and wipe out several of your existing debts all at once.