Debt consolidation loan for bad credit: pros, cons, and cautions

By Rebecca Lake

Reviewed by Kimberly Rotter

Aug 07, 2023

Read time: 7 min

 mother working and children studying at home in kitchen. Father on phone in the background

Key takeaways:

  • Debt consolidation combines debts to make repaying them more manageable. 

  • It's possible to get a debt consolidation loan with bad credit. 

  • Personal loans and home equity loans are two ways to consolidate debt.

Debt struggles and credit problems often go hand-in-hand and can turn into a downward spiral. Poor credit can limit your financial options for managing debt, and debt  problems can cause your credit standing to suffer. 

But that doesn’t mean there’s no way out. 

Here’s some inside info: you don’t need great (or even good) credit to get rid of your debt. You also don’t need a big bank account or a huge income. 

You need two things: the desire and the willingness to do something about your debt. 

One of your options is debt consolidation. Debt consolidation could streamline your finances, lower your payments, or even save you money. Some debt consolidation loans are available to borrowers with lower credit scores. And even if you don’t qualify for a loan, there are other ways to streamline your payments and save on the total cost of your debt.

We’ll answer your questions about debt consolidation loans so that you are better prepared to choose the best path forward.

Debt consolidation: a closer look

What is debt consolidation? In simple terms, it means combining multiple debts into one. 

Typically, you'd use a new loan to pay off several old ones. The idea is to simplify your debt repayment and hopefully save some money in the process. Debt consolidation might be a good fit if you have:

  • High-interest credit card balances

  • Retail store credit cards

  • Outstanding medical bills

  • Installment loans

Student loans are treated differently. You can consolidate federal student loan debt, but generally not through a private loan. It’s not that lenders don’t want to help you streamline your finances. Rather, it’s because student loans follow a different set of rules than other kinds of loans. The Department of Education has a special program just for federal student loan consolidation. For private student loan consolidation questions, you can work with your private student loan lender. Other lenders, including Achieve, will let you know that you can’t use their loan to pay for or refinance post-secondary expenses. 

Debt consolidation pros and cons

Why would you consolidate debt if you have bad credit? Here are some of the benefits. 

  • Trading several payments for one makes it easier to pay on time.

  • You might pay less overall if you're able to get a lower interest rate.  

  • Paying off credit cards with another type of loan could improve your credit standing. (The amount you owe on your credit cards has a big impact on your credit profile.)

  • You may be able to get rid of debt faster by sticking to your payment plan, especially compared to making minimum payments on your credit cards.

  • Consolidating debts can stop collection actions if you use the new loan to pay off past-due accounts.

That said, no solution is perfect for everyone, and debt consolidation does have potential drawbacks. 

  • Bad credit loans carry higher interest rates. If you don’t qualify for a lower interest rate, you might not save money.

  • Most debt consolidation loans have lender charges.

  • Consolidating debt won’t help if you have an overspending problem.

  • If you’re considering bankruptcy, paying off unsecured debts (like credit cards) with a secured loan (like a home equity loan) could be a disadvantage. Bankruptcy is complicated, so it’s a good idea to talk to an attorney before making any decisions.

Before you consolidate your debt, ask these questions:

  • What benefits do you hope to get? Will you save money? Get a more affordable payment? Get rid of your debt sooner?

  • Can you control your spending? 

  • Does the new loan have better terms than the accounts it would replace? 

  • Can you afford the loan payment? 

Debt consolidation options for bad credit

Debt consolidation loans for bad credit can be secured or unsecured. Secured means you pledge something valuable as a guarantee that you’ll repay the loan. That valuable thing is called “collateral” and if you fail to repay your loan, the lender could take steps to sell it and recover the money they are owed. Collateral makes the loan less risky for the lender, so secured loans often cost less than similar unsecured loans. Unsecured loans are backed only by your promise to repay them. 

Home equity loans are always secured by your property. Most personal loans are unsecured

Personal loans

You can find personal loans for debt consolidation at local banks and credit unions or online. 

  • Loan amounts can range from $1,000 to $100,000 or more. The amount you can borrow will be determined by your credit score, income, and other financial obligations, and the lender’s minimum and maximum loan amounts. 

  • Personal loan interest rates are usually fixed. The interest rate won’t change once you get your loan. Your monthly payments are predictable for the entire life of the loan. 

  • Repayment terms range from one to over ten years. Two to five years is typical. 

Some lenders accept applications from people with bad credit. Borrowers with lower credit scores generally don’t qualify for the highest loan amounts or the lowest interest rates. 

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Home equity loans

A home equity loan lets you borrow against your home's equity. Home equity is the difference between what you owe on your house and what it's worth. 

Here's how using a home equity loan to consolidate debt works.

  • Home equity loans are mortgages and your home is the collateral. 

  • Lenders typically allow you to borrow against 75% to 85% of your property value. 

  • Home equity loans can take a little longer to get and might have higher costs.

Home equity loans tend to have lower interest rates than personal loans. At Achieve, you can apply for a home equity loan to consolidate debts if your credit score is at least 640.

Homeowners, get help with your high-interest debt

Use the equity in your home to consolidate debt, lower your monthly payments, and reduce your stress.

Bad credit debt consolidation with a co-signer

A co-signer is someone who agrees to be responsible for a debt if you fail to repay it. Having a co-signer could make it easier or cheaper to get a loan.

The benefit is that your co-signer’s credit standing and income could help you qualify for a loan that you might not have been able to get on your own. 

The caveat is that the payment history will show up on both people’s credit reports. That’s great if you’re making your payments on time. But if you don’t, your co-signer’s credit standing could suffer. Not only that—the lender can sue you both for non-payment. If something were to happen that prevents you from making good on the loan, your co-signer’s credit and finances could suffer.

The role credit plays in debt consolidation

Your credit profile affects whether you can get approved for a loan for debt consolidation, as well as the interest rate you’re offered.  

A lower credit score tells lenders that you’ve struggled to handle your credit accounts. The reason doesn’t matter. A lower score is usually a red flag to lenders. 

Each lender decides what credit score is needed for their loan. Most lenders consider a FICO® score under 580 to be poor. FICO scores are the most widely used among lenders and range from 300 to 850. Lower scores indicate greater risk for the lender.

How to consolidate debt with bad credit

If you're ready to consolidate debt with bad credit, here's a simple checklist to help you get started. 

  • List your debts, their balances, payments and interest rates. Decide which you’ll consolidate. 

  • Get a rate quote online to find out what loans you might qualify for. 

  • When you find the right loan, submit your application along with any paperwork the lender requires. 

  • If you're approved, provide information about the debts you’re consolidating. The lender can often send the funds directly to those other creditors. If they do not offer that service, provide your bank account information to receive your money electronically.

  • When the loan proceeds hit your bank account, use the money to pay off your creditors.

  • Start making loan payments according to the schedule set by the lender. 

That's really all there is to it. The main thing to keep in mind is that you don't want to run up new balances on credit cards after paying them off. Otherwise, you might end up with even more debt than you started with.

Alternatives if you can't find an acceptable loan

You've shopped around, and you can't find the right loan to consolidate debts. So now what? 

You could try debt resolution instead. When you resolve debts, you negotiate with your creditors to let you pay them off for less than what you owe. It's a legitimate way to get rid of debt without paying in full. It’s an option to consider if you can’t afford to repay your debts without some degree of debt forgiveness.

Consolidating debts doesn’t reduce how much you owe. Debt resolution, on the other hand, can help you reduce your debt. For example, you might owe $10,000 on credit cards but negotiate with your creditor to accept $7,500 and consider it payment in full.  

Resolving your debts could be the right move if you've fallen behind on debt payments. Creditors usually aren't willing to negotiate unless accounts are past due. You may also consider talking to a debt counselor about debt resolution if you're in danger of being sued or considering bankruptcy.

You can also try creating your own debt payoff plan without getting a loan. The Achieve GOOD app (Get Out Of Debt) can help you track your debts and your progress and give you tools and suggestions for getting rid of your debts on your own.

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

Tips to improve your credit score

Just because you have bad credit now doesn't mean you’re stuck with it forever. Here are some of the best ways to take your credit score from bad to good. 

  • Commit to paying bills on time. Your payment history influences your credit score more than any other factor. You can’t get good credit without paying on time.

  • Lower your credit card balances. Credit utilization is the second most important factor affecting your score. That’s how much you owe on your credit cards compared to your credit limits. Pay your accounts off over time and avoid carrying balances in the future. 

  • Ask for higher credit limits. Because utilization is a percentage, increasing your credit limits can help. Ask for credit line increases if you can avoid increasing your balances.

  • Dispute credit report errors. Mistakes could be dragging down your scores. Get copies of your credit reports from and dispute any errors you find.

You can do one or all of these things to raise your credit scores. Results may take time, so be patient. In the meantime, create a budget to avoid taking on new debt. The Achieve MoLO app makes budgeting simple and puts you in control of how you spend. 

Rebecca Lake - Author

Rebecca is a senior contributing writer and debt expert. She's a Certified Educator in Personal Finance and a banking expert for Forbes Advisor. In addition to writing for online publications, Rebecca owns a personal finance website dedicated to teaching women how to take control of their money.

kim rotter 2022 2

Kimberly is Achieve’s senior editor. She is a financial counselor accredited by the Association for Financial Counseling & Planning Education®, and a mortgage expert for The Motley Fool. She owns and manages a 350-writer content agency.

Frequently asked questions

You could be denied a debt consolidation loan if you don’t meet the lender's requirements. If you're denied, consider other options for managing debt or work on raising your score so that you can qualify for a loan.

If you have debt, bad credit, and no money, then you might need to get creative. If you can’t afford to pay off your debts and you don’t qualify for a loan, you could consider debt resolution or bankruptcy.

The minimum credit score for a loan varies by lender. If you're trying to get a loan with bad credit, the minimum credit score might be 580. Many lenders have a higher minimum credit score.

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