How To Get a Debt Consolidation Loan With Bad Credit

Debt consolidation loans can help you lower your interest rate, reduce the number of monthly payments you make, and simplify your overall finances. Unfortunately, it can be more challenging to get a debt consolidation loan if you have bad credit. You may be subject to higher interest rates or may not qualify for a loan at all.

The good news is that even if you have bad credit, there are steps you can take to improve your chances of qualifying for a debt consolidation loan and improve your finances.

Compare rates on loans for bad credit

What is a debt consolidation loan for bad credit?

With a personal loan for debt consolidation, a lender provides you with a lump sum payment after approval. You get the money upfront and use it to pay off multiple debts, such as credit cards. Some lenders offer the option of paying your creditors directly. In either case, you're responsible for repaying the debt consolidation loan in monthly installments.

If you have a bad credit score, and high-interest debt is a contributing factor, a debt consolidation loan could help address both problems. 

Compare loan rates

One of the most important steps in getting a debt consolidation loan is doing your research and shopping for the best loan rates and terms. Personal loan interest rates can vary from one lender to the next.

Here are a few factors to consider when comparing different debt consolidation loan offers:

• APRs
• Loan amounts
• Repayment terms
• Origination fees
• Prepayment penalties

Check your credit history

It's critical to check your credit history for errors. Almost half of the people who checked their credit reports as part of a 2024 study found errors. While some errors may simply be incorrect personal information, others can be accounts that aren't yours, which could damage your credit.

The simplest way to check your credit report is with AnnualCreditReport.com. This website, authorized by federal law, allows you to view your credit reports from the three major bureaus — Equifax, Experian, and TransUnion — in one place.

Improve your debt-to-income ratio

Your debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes toward debt. Generally speaking, a lower DTI is better, and lenders generally have a maximum allowable DTI to qualify for a debt consolidation loan. Most lenders prefer a DTI no higher than 35%.

If you have a high DTI, you may need to work on reducing your debt before qualifying for a debt consolidation loan. Some strategies include using the debt snowball or debt avalanche methods. At the same time, consider reducing your monthly spending and using a budget to help allocate more money toward debt.

Another way to reduce your debt, and therefore your DTI, is to negotiate with your creditor or lender to lower your interest rate or settle your debt for a lower amount.

Learn More: What Is Debt-To-Income Ratio?

Get a secured loan

When applying for a personal loan, you can choose between an unsecured and a secured loan. Most personal loans are unsecured, meaning they aren't backed by any collateral. The benefit is that you don't risk losing an asset, such as your car or house, if you can't repay the loan. However, unsecured loans may be more difficult to qualify for and have higher interest rates.

Consider a cosigned loan

If you can find a lender that offers them, getting a personal loan with a cosigner can help you qualify for a loan with bad credit, or lower your rate. Just be sure that your cosigner has good credit.

When comparing lenders, check if they allow cosigners on personal loans. Also, be mindful of the responsibilities of a cosigner: They're legally responsible for repayment if you can't meet your monthly obligation. Even late payments on your part can damage their credit (as well as yours), as would defaulting entirely on the loan.

Pros and cons of debt consolidation

There are many reasons to pursue debt consolidation, but while it comes with several benefits, there are also some downsides to consider before applying for a loan.

Pros

• Save money: Consolidating credit card debt or other high-interest debt with a personal loan could help you save on interest. APRs on personal loans tend to be lower than credit card APRs. However, you will likely have trouble qualifying for a low APR on a personal loan with bad credit. Some credit cards charge a penalty APR if you miss payments, fail to make minimum payments, or violate other terms. The penalty APR could be higher than the card's standard APR.
• Fewer monthly payments: When you consolidate your debt, you'll have just one monthly payment on your debt consolidation loan instead of making separate payments for each of your debt accounts.
• Faster repayment: When you have a lower interest rate and fewer monthly payments, you may find you can be more aggressive with your repayment and pay your debt off more quickly than you'd otherwise be able to.
• Improved credit: Debt consolidation can improve your credit for several reasons, including paying off past-due accounts, lowering your credit utilization, and improving your payment history as you pay off your loan.

Cons

• May be difficult to qualify: If you have bad credit, you may struggle to qualify for a debt consolidation loan. And if you do qualify, you may have less-favorable interest rates.
• Loan fees: Debt consolidation loans for bad credit often require an upfront origination fee. These fees can amount to hundreds or thousands of dollars, depending on the size of your loan, and are deducted upfront — meaning you'd receive less than the amount you applied to borrow.
• Secured loans risk assets: If you have difficulty getting an unsecured personal loan and instead apply for a secured loan, you put your collateral at risk. If you fail to repay your loan, the lender can take whatever asset you used as collateral.

How to apply for a debt consolidation loan

Here's how to apply for a debt consolidation loan:

1. Check your credit score: Before applying for any loan, check your credit score first. You'll have a better idea of whether you'll qualify and what lenders you should consider.
2. Prequalify: Many lenders allow you to prequalify for a personal loan, which lets you gauge if you're likely to qualify and at what rate — without affecting your credit score. Prequalify with multiple lenders to compare potential rates and terms.
3. Compare loan quotes: Once you've prequalified with several lenders, compare APRs, rates, terms, and whether lender quotes include an origination fee.
4. Apply for a loan: Once you've chosen the best lender, officially apply for the loan. During this process, expect to provide financial information to verify your income, employment, and ability to pay.
5. Review the offer: If your application is approved, the lender will send an official offer for your review. Confirm that the terms, including the monthly payment amount, APR, repayment term, and upfront fees are as expected. If you agree, sign the loan document to move forward.
6. Get your loan funds: Once you've accepted a loan offer and completed the paperwork, you'll receive your funds. Funding times vary, but most online lenders can send money either within one business day of approval or a few days.

How to improve your credit score

Here are a few steps you can take:

1. Dispute credit report errors: If you find errors on your credit report, dispute them directly with the credit bureaus. Assuming the reports are incorrect and you've supplied enough supporting information to the credit bureau, they may be removed from your credit report, along with any negative impact they had on your credit score.
2. Address past-due debts: If you have any, pay them as soon as possible. Yes, your missed payments will still appear on your credit report. But getting out of delinquency will help improve your credit.
3. Get a credit-builder loan: Credit-builder loans come with shorter repayment terms — from six months to two years — and your funds are deposited into a locked savings account until you've paid off the loan. With this type of loan, you'll make regular principal and interest payments that are reported to each of the three major credit bureaus, and you'll get your funds at the end of the loan term.
4. Improve your payment history: Payment history is the most important factor in determining your credit score. Set up autopay and calendar alerts for due dates to avoid missing payments.
5. Reduce your credit utilization: You can improve your credit score by using less of your available credit on your cards or other revolving credit accounts. If you currently have credit card debt, consider paying some of it off before applying for a debt consolidation loan.
6. Become an authorized user: This is one of the fastest and most effective ways to improve your credit score. Ask a loved one or friend with good credit to add you as an authorized user on their credit card. You'll get credit for the positive payment history on your credit report and can benefit from their available credit, which can quickly boost your credit score.

Learn More: Where to Get a Personal Loan

Alternatives to debt consolidation

A debt consolidation loan can be a great option to help you manage your debt, but it's not the only option. Here are a few alternatives to consider:

• Debt management plan: This type of plan involves working with a credit counselor, who negotiates with your creditors to lower your interest rates, waive fees, or adjust your loan in other ways. You'll make payments directly to the credit counseling organization, which will distribute them to your creditors. The National Foundation for Credit Counseling can help you find a nonprofit credit counseling agency.
• Home equity loan or line of credit: These options allow you to borrow against your home equity. Like a personal loan, the money can be used for nearly anything. Because the loan is secured by your home, you may get a lower interest rate. However, because your home is used as collateral, you risk foreclosure if you can't repay the loan.
• Balance transfer: If you have an existing credit card (with available credit), check if you have a 0% APR balance transfer offer. You could then transfer high-interest balances to that card with the goal to pay them off by the end of the introductory APR period, which could be up to 21 months. There's typically a balance transfer fee up to 5% and you'd have to repay the debt within the 0% introductory APR period to avoid paying the card's regular APR.

• Debt settlement: When you go through a debt settlement program, a company works to settle your debt on your behalf. For instance, the company may negotiate with the lender to get them to accept a reduced amount. But debt settlement programs often require you to stop making payments, which can harm your credit and possibly lead to legal action from your creditors. This is not a course we generally recommend.
• Bankruptcy: This should be a last resort to help you manage debt. Bankruptcy is a court process that discharges certain unsecured debts, helping you get a fresh start. However, bankruptcy will stay on your credit report for seven to 10 years, is detrimental to your credit score, and doesn't discharge all types of debt.

Related: Debt Consolidation vs. Balance Transfer

Disclosure: Some lending partners that participate in Credible’s comparison marketplace offer loans to borrowers with scores as low as 550. Borrowers with low scores will have fewer lending options than borrowers with higher credit scores.