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

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 could 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

What about student loan consolidation?

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? Let’s go over the pros and cons of debt consolidation.

Here are some of the benefits. 

• Trading multiple payments for one could make it easier to pay on time.

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

• Paying off credit cards with an installment loan could have a positive impact onyour credit standing. (High credit card balances tend to have a negative impact on credit. Installment loans don’t affect your credit profile the same way.) 

• 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. 

Here are some 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 typically range from one to over ten years. Two to five years is common. 

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. 

Home equity loans

A home equity loan lets you borrow against your home 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. This limit includes your first mortgage if you still have one.

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

Because they are secured by the home, home equity loans tend to have lower interest rates than personal loans. 

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, it could have a negative impact on your co-signer’s credit standing. 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. Stick with lenders like Achieve who check your credit with a soft inquiry that doesn’t harm your score.

• 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, could help you reduce your debt. 

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 expert 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) helps you track your debts and your progress and gives you tools and suggestions for getting rid of your debts on your own.

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 standing from bad to good. 

• Commit to paying bills on time. Your payment history influences your credit profile 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 could 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 (it’s free, once a week) of your credit reports from AnnualCreditReport.com and dispute any errors you find.

You can do one or all of these things to raise your credit scores and improve your credit standing Results may take time, so be patient and stick with it. 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. 

Achieve is not a Credit Repair Organization and does not provide, or offer, services or advice to repair, modify, or improve your credit.