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Debt consolidation loans let borrowers take out a single loan that covers the outstanding balance on some or all of their unsecured loans. The consolidation loan is then used to pay off each of the individual loans so the borrower is only responsible for a single monthly debt payment. This results in a more streamlined repayment process and can give the borrower access to a lower overall interest rate.

When evaluating loan applications, lenders generally look for a credit score between 580 and 620. However, lenders also consider factors like the applicant’s ability to repay the loan. Qualifying for a debt consolidation loan can be more difficult if you have bad credit but it’s still possible—especially if you’re open to getting a secured loan or having a co-signer.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a type of personal or business loan that enables borrowers to take out a loan for a period of two to seven years. Borrowers can use these loans to pay off multiple individual loans—thus, consolidating them into a single loan with only one monthly payment. Consolidation loan interest rates range from 5% to 36% so, depending on their creditworthiness, a borrower may also be able to lower their overall interest payment. But if you only qualify for an interest rate on the high end of the range, getting a consolidation loan may not lead to any savings.

Types of Debt To Consolidate

In general, a borrower can consolidate loans or credit lines that are not secured by a home or otherwise collateralized. Common types of debt to consolidate include but are not limited to:

  • Credit card balances
  • Student loans
  • Unsecured personal loans and personal lines of credit
  • Payday loans
  • Income taxes
  • Hospital and other medical bills
  • Cell phone and utility bills
  • Court judgments, not currently under enforcement through garnishment or other collection remedies

How to Get a Debt Consolidation Loan

If you think a debt consolidation loan is a good fit for you, follow these steps:

1. Determine Your Credit Score

Before you apply for a debt consolidation loan, check your credit score on a free site or with a reporting service through your credit card company. Lenders generally look for a credit score between 580 and 620 when extending consolidation loans, so it’s best to know your score before you apply—especially if you have a weak credit history.

2. Boost Your Credit Score

For those with a poor credit score, boosting your credit can improve your chances of qualifying for a debt consolidation loan. However, mending credit can be a long, difficult and sometimes confusing process. To increase your credit score in the short term, focus on paying your bills on time, keeping current accounts open and limiting hard inquiries on your credit report. You can also dispute any inaccurate information on your credit report or use a tool like Experian Boost to get credit for utility and cell phone payments.

Keep in mind, though, that Experian Boost only impacts your FICO Score 8, and while that scoring model is the most widely used, some lenders might use a different score type or model to extend you a consolidation loan. So Experian Boost might not help in all circumstances.

3. Shop for Lenders and Get Prequalified

Once you know your credit score, start shopping for a lender. If you have an existing relationship with a local bank or credit union, start there; but keep in mind that they may have more rigorous qualifications. Then, research online lenders and compare factors like interest rates, loan terms and lender fees.

When reviewing your application for a debt consolidation loan, a lender will run a hard credit check that can negatively impact your credit score. However, lenders can prequalify you for a loan by running a soft credit check, which will not show up on your credit report.

If you’re afraid your credit score is too low to get approved for a consolidation loan, consider getting prequalified by several lenders. This can help you determine the likelihood of getting approved for a loan. Then you can compare interest rates and other terms to choose the best debt consolidation loan—and lender—for you.

4. Choose a Secured Loan

If a borrower isn’t happy with the options available following the pre-qualification process, they may increase their chances of qualifying for a consolidation loan by applying for a secured loan. Secured loans often come with lower interest rates and may be easier to obtain because they are collateralized by the borrower’s home or other valuable assets like investments. However, if your score is high enough to qualify for an unsecured loan, it’s best not to pledge collateral unless you’re confident in your ability to make on-time payments. If you fall behind on payments, you could lose the asset you’ve used as collateral.

5. Find a Co-signer

Likewise, loan applicants with poor credit can access better lending terms by having someone with strong credit co-sign on the loan. This means that if the borrower fails to make payments on the consolidation loan, the co-signer will be on the hook for the outstanding balance. In general, lenders look for co-signers who have good or excellent credit scores and who have enough income to cover payments on the co-signed loan and their own debt service.

Qualifying for a Debt Consolidation Loan with Bad Credit

If you can’t qualify for a debt consolidation loan because of your credit score, consider strengthening your application by improving your debt-to-income ratio. This can be done by increasing your income—with a side hustle or otherwise—or by paying off some of your smaller, more manageable debts.

Secured loans may also be more accessible to applicants with bad credit because they reduce the lender’s risk and often come with lower interest rates. Those without home equity or other valuable collateral may be better served by having someone with better credit co-sign on the consolidation loan. If a secured loan or co-signer is not possible, borrowers with bad credit can focus their energies on do-it-yourself debt repayment using the debt snowball or debt avalanche methods.

Where to Get a Debt Consolidation Loan for Bad Credit

Debt consolidation loans are available from a number of traditional and online lenders. Traditional lenders like credit unions and banks generally offer lower interest rates. Online lenders, in contrast, provide borrowers access to faster closing times and lower qualification requirements, making them ideal for those with bad credit. However, these loans typically come with higher interest rates so it’s important to shop around.

Who a Debt Consolidation Loan Is Right For

Getting a debt consolidation loan is a great way for some people to simplify their monthly payments and reduce overall interest charges. However, for borrowers with poor credit, inconsistent income or poor spending habits, a debt consolidation loan may not be the best solution.

Debt consolidation might be right for you if:

  • Your credit score is high enough to qualify for a low-interest loan
  • You have enough home equity to utilize your house as collateral for a secured loan
  • Your monthly debt service totals 40% or less of your monthly income
  • You are already taking steps to improve your finances and reduce spending
  • Your monthly cash flow consistently exceeds your monthly debt payments

How to Eliminate Debt with a Consolidation Loan

Debt consolidation loans can help borrowers eliminate debt by streamlining payments and—in some cases—reducing interest rates. However, to effectively eliminate your debt with a debt consolidation loan you must also take steps to improve your finances and pay down the consolidated loan.

This may include making and sticking to a budget so you consistently spend less than you earn. Borrowers who are trying to eliminate debt with a consolidation loan should also stop adding to their debt by pausing their credit card use and keeping monthly balances low.

Finally, debt consolidation loans are most effective when the borrower maintains open communication with the lender—so if you’re struggling to make payments, let your lender know as soon as you can.

Debt Consolidation Loan Costs

Debt consolidation loans typically come with an interest rate between 5% and 36% that varies based on the applicant’s creditworthiness, income and debt-to-income ratio. Depending on your outstanding loans, a debt consolidation loan may have a lower interest rate than you’re currently paying—but it may be higher if you have a low credit score.

In addition to paying interest, borrowers may encounter annual lender fees as well as costs associated with loan origination, balance transfers and closing. Additional costs of a debt consolidation loan may include:

  • Loan origination fees
  • Balance transfer fees between 3% and 5% of the total balance
  • Closing costs
  • Annual fees

Pros and Cons of Debt Consolidation Loans

The pros of debt consolidation loans are:

  • Reduce multiple debts to one monthly payment
  • Lower overall interest rate
  • Improve your credit with on-time payments
  • Lower total monthly payment by increasing the loan term
  • Can shorten the amount of time it takes to pay off certain types of debt, like credit cards

The cons of debt consolidation loans are:

  • Depending on the lender, you may have to cover high upfront and/or annual fees
  • If you have a low credit score, it may be difficult to get a low interest rate
  • Consolidation alone doesn’t fix poor financial habits and is not a guaranteed way to get out of debt

Alternatives to Debt Consolidation Loans

If you have a low credit score, it can be difficult to qualify for consolidation loan terms that meet your needs. If you’re struggling to find acceptable loan terms, consider these alternative approaches to debt consolidation:

  • Debt management plan. A debt management plan lets borrowers consolidate credit card balances into a single debt—much like a consolidation loan. These plans usually span three to five years and are offered by credit counseling agencies.
  • Home equity loan. A home equity loan is a second mortgage paid out in a lump sum that can let a homeowner consolidate their other debts. This can be a good consolidation alternative for borrowers with at least 15% to 20% equity in their home.
  • DIY debt payoff options. Borrowers with low credit scores may not have many debt consolidation options and it may become necessary to pay off their debts without a consolidation loan. There are several ways to wipe out debt on your own but the debt snowball and debt avalanche methods are the most popular.

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