Debt consolidation is a debt management strategy that allows you to combine multiple debts into a single payment. Having one account can be easier to manage. Also, if you have higher than average interest rates due to bad credit or credit card debt, it could help you lower your average rate.
One of the most common ways to consolidate debt is to take out a debt consolidation loan — a personal loan used to pay off multiple creditors. Although it may be tough to get this type of loan with bad credit, there are several actions you can take to increase your loan approval odds. Plus, there are alternative options to consider.
Benefits of a debt consolidation loan
Someone might get a debt consolidation loan for one of several reasons. The biggest benefits of a debt consolidation loan include:
- Simplified finances: A debt consolidation loan rolls multiple monthly payments into one. Having only one lender and one monthly bill to worry about could help you pay off your debt more consistently and avoid missed payments, which lower your credit score.
- Lower interest rate: It’s generally only wise to get a debt consolidation loan if you can get a better interest rate than what you’re paying on your debt now. If you’re paying an average of 16 percent to 20 percent on your credit cards and you can get a debt consolidation loan for 14 percent APR, you’ll save money overall.
- Fixed payment: Most debt consolidation loans have fixed interest rates and a set repayment term, so your monthly payment will be the same every month — unlike monthly payments on credit cards.
4 steps to getting a debt consolidation loan for bad credit
If you’re struggling to get out of debt and think a debt consolidation loan can help, you’ll likely have to have a credit score in the mid-600s, a history of on-time payments and sufficient income to qualify. However, every lender has its own requirements. Start with the following steps to help you find the right personal loans for debt consolidation and boost your chances of approval.
1. Check and monitor your credit score
Lenders base loan decisions largely upon the condition of your credit. Generally, the lower your credit score, the higher the interest rates lenders will offer you on financing. To qualify for a debt consolidation loan, you’ll have to meet the lender’s minimum requirement. This is often in the mid-600 range, although some bad-credit lenders may accept scores as low as 580.
Many banks offer free tools that allow you to check and monitor your credit score. Once you know your credit score, it’s easier to identify lenders that may be willing to work with you. Not only are there lenders that specialize in loans for people who have bad credit, but many list credit score requirements on their websites.
Takeaway: Check with your bank or credit card issuer to see if it offers tools that allow you to check your credit score for free.
2. Shop around
It’s rarely a good idea to accept the first loan offer you see. Instead, do your research and compare loan amounts, repayment terms and fees from multiple sources, including local banks, national banks, credit unions and online lenders. This process can take time, but it might save you hundreds, if not thousands, of dollars.
The easiest starting point may be online lenders because you can often view your rates with a soft credit check, which won’t hurt your credit score. However, it may also be worthwhile to check offerings with your existing bank;
3. Consider a secured loan
Personal loans for debt consolidation are typically unsecured, meaning they don’t require collateral. If you’re having a hard time getting approved for an affordable unsecured debt consolidation loan, a secured loan might be worth considering.
Secured loans require some form of collateral, such as a vehicle, home or another asset. The collateral usually has to be worth enough to cover the loan amount if you default. Because of this, it’s typically easier to get approved for a secured loan than an unsecured one, and you may even qualify for a better interest rate.
Takeaway: To increase your loan approval odds and chances of landing a lower rate, shop around for a secured personal loan.
4. Wait and improve your credit
If you’ve tried everything and can’t find a loan that will help you save money, it may be best to hold off and take some time to establish a better credit score.
Make it a goal to pay your monthly debts on time every month for several months in a row. It’s also a good idea to focus on paying down credit card balances and eliminating all nonessential monthly expenses, such as subscriptions and eating out frequently.
“Make a short-term plan that ensures you’re consistently allocating money towards debt payments every month,” says Steve Sexton, CEO of Sexton Advisory Group. “Once you’ve built momentum for a month or two, request a meeting with your bank or credit union to review your efforts and apply for a debt consolidation loan. You’ll have better luck with a bank or credit union vs. an online lender because you can show that you’ve already started taking the steps to paying down your debt and correcting the issue.”
It’s also a good idea to get a copy of your three credit reports, which you can do for free once a year — or weekly through April 2022 through AnnualCreditReport.com — and check for errors. If you find any, you can dispute them with the three credit reporting agencies, Equifax, Experian and TransUnion.