Updated: Nov 9, 2021
How Can I Get a Debt Consolidation Loan With Bad Credit?
Estimated read time: 6 minutes
Thanks to low interest rates, the high cost of living, and stagnant wage growth in many countries, it's not uncommon for people to find themselves getting into debt. Over time, the number of obligations that a person has can rise, with car loans, credit cards and personal loans being the most common forms of debt.
People who seek out debt consolidation are typically already struggling to repay their existing loans. Those in debt would rather consolidate all of their debt into a single monthly payment, agreed upon with a single creditor, than have to deal with many people calling them up, sending them letters, and asking for repayment.
The problem, though, is that by the time a person needs debt consolidation, their credit rating—the tool lenders use to assess creditworthiness—is already in bad shape.
Lenders want to see a healthy credit report because they need evidence that they will be repaid. When credit scores go down, interest rates go up because it's riskier to lend to a person with a poor credit score.
So can you get a debt consolidation loan with a bad credit score?
The answer depends on the lender. Some will agree to consolidate all of your debts into a single loan, even if you have bad credit, but they may ask for a higher rate of interest on the loan. Most people, however, can get a debt consolidation loan if they can prove to the lender that they can make the monthly repayments.
Most prudent lenders will work closely with you to create a repayment plan that is both affordable and sustainable over the long term. Typically, if you owe less than $10,000 overall, you can take out a debt consolidation loan without hurting your overall credit rating, meaning that you're less likely to get a nasty surprise when the first bill comes through.
Remember, it may be cheaper overall to consolidate your debt, and a lot less stressful, because all of your risk is pooled with a single agency.
How to Get a Debt Consolidation Loans With Bad Credit
When you apply for a debt consolidation loan with bad credit, there's no guarantee that you'll get the loan you want outright. Instead, you may have to try several different methods to convince the lender that you can indeed repay the loan and give them their money back.
Agree to Pay a Higher Interest Rate
The first way to incentivize a lender to consolidate your debt is to pay a higher rate of interest on the consolidated loan. By paying more interest, you become more profitable to the lender, and they can cover the risk of lending to you more easily. The downside of this is that you may have to spend more money repaying the loan. You could also end up paying more in total at the end of the month than you would if you paid off each of your creditors individually. Sometimes, though, it is still cheaper (or, at the very least, more convenient) to organize repayment through a single lender.
Get a Cosigner
Sometimes a debt consolidation lender will refuse to lend to you on the basis of bad credit, even at a higher rate of interest. When this happens, don't despair: you still have options. One option is to find somebody that you know and trust who has a better credit rating than you to be a cosigner. The job of the consigner is simple: they agree to pay the lender the loan if you fail to make repayments. As the borrower, it's your responsibility to pay the lender back, but if you run into trouble, the cosigner can take up the slack, bridging payments that you're unable to make. Most cosigners, even family members, will insist that you do all you can to repay the loan and that you don't rely on them to get you out of a sticky financial situation.
Offer Collateral
There is a third and final way that you can get a consolidation loan with bad credit: offer your creditors collateral. Collateral just means something tangible that your lenders get if you can't repay the loan—a car, or equity in your home, for instance. If you fail to repay the loan, the lender can get its money back by selling your assets. It's a kind of guarantee for the lender that they will be repaid, no matter what and, as a result, you often find that you can attract lower interest rates. The downside is that you could lose ownership of your home or another asset if you don't make repayments on time.
How to Resolve Bad Credit to Get a Consolidation Loan
The options we've covered so far represent what happens when you have bad credit, but there's no need to live with a poor credit rating forever. There's a lot that you can do to improve bad credit right now, increasing your odds of getting a consolidation loan.
Change the Habits That Led to Your Poor Credit Rating
Poor credit ratings don't just happen by chance (unless you've been incredibly unlucky). They are usually the result of some habit that you may have developed in the past. We all make financial mistakes, but these can be costly if they are not addressed. Take a look at your financial history. Have you failed to pay back loans in the past? Have you paid other bills late? If so, then ask yourself why. Are you living a lifestyle that your income can no longer support? Scale back luxury purchases, downsize or reduce your entertainment budget while at the same time, focusing on income-generating activities.
Delve Into Your Credit Report to Find Inaccuracies
Your bad credit might have nothing to do with your creditworthiness. It could merely be an artifact of poor data collection on the part of credit rating agencies. Credit rating agencies can and do make mistakes on credit reports, leading lenders to ask for higher interest rates on loans than they should. Your credit report can also suffer because you've been a victim of fraud.
The good news is that you can check your credit report (or get an agency to do it for you) and report issues to the rating agencies themselves. It's worth reporting mistakes because doing so can improve your score considerably.
The Benefits of Debt Consolidation Loans
Debt consolidation loans offer a variety of benefits over and above paying back an array of lenders individually every month.
Simplify Your Repayment Schedule
Managing multiple lenders, each with particular repayment schedules, can be an administrative headache. Organizing payments on numerous days of the month not only takes up your time but adds stress too. Under ideal circumstances, you'd directly pay a single lender on a given day of the month, and spend the rest of your time focusing on generating income and enjoying your life. With a debt consolidation loan, that's precisely what you get: a single, easy-to-manage payment which leaves your account in a predictable fashion.
It Can Help You Save Money
Although not all debt consolidation loans guarantee that you'll save money, most people find that they pay less in repayments each month, and overall. Whether you save money depends on the terms of your debt consolidation agreement, but with a low enough interest rate, you can often get cheaper repayments than you could through regular payments to individual creditors.
Why focus on both monthly and overall repayments? Because both are important when considering a debt consolidation loan. A consolidated loan may offer lower monthly repayments, but you may have to pay the loan off over a longer time horizon, meaning that the total amount you need to repay is higher than it would otherwise have been.
You Might Get a Lower Interest Rate
Although not guaranteed, many people who take out consolidation loans find that they get a lower interest rate. Consolidation loans come with lower interest rates than many high interest debt products, like credit cards and personal loans. The reason for this is that the consolidation lenders can often secure the lending against either your existing assets or get a cosigner to reduce risk.
The Bottom Line
Although there are some hoops to jump through, getting a debt consolidation loan with bad credit is possible. Putting your debt into a consolidation loan helps you manage your credit, reduce your overall debt and avoid painful financial experiences, like bankruptcy, which could affect what you can do in the future (like setting up a business or buying a house). But remember, there are plenty of things that you can do to not only get a loan but improve your credit score too, making loans cheaper and more accessible.