How Debt Consolidation for Bad Credit Works: A Complete Guide for Beginners

Last Updated on November 13, 2020

This page provides detailed information on How Debt Consolidation for Bad Credit Works. Here you will learn what debt consolidation is, the different types of debt consolidations, where to consolidate debts with bad credit, how to choose the best debt consolidations, best debt consolidations for bad credit, debt consolidation eligibility and requirements and all other important debt consolidation information you may need. Please stay tuned.

What Is Debt Consolidation?

The term debt consolidation refers to the act of obtaining a new loan to pay off liabilities and other consumer debts, generally unsecured ones. Multiple debts are combined into one larger portion of debt, usually with more favorable payoff terms. Favorable payoff terms include a lower interest rate, a lower monthly payment, or both. Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt, and other liabilities.

Types of Debt Consolidation?

There are two main types of debt consolidation loans: secured and unsecured loans. Secured loans are backed by one of the assets of the borrower, such as a house or car. The asset, in turn, serves as collateral for the loan.

Unsecured loans, on the other hand, are not backed by assets and can be more difficult to obtain. They also tend to have higher interest rates and lower qualifying amounts. With either type of loan, interest rates are still typically lower than the rates charged on credit cards. And in most cases, the rates are fixed, so they do not vary over the repayment period.

There are several ways to consolidate your debts by combining them into one payment. Here are some of the most common.

Debt Consolidation Loans

Many creditors (traditional banks and peer-to-peer lenders) offer debt consolidation loans as part of a payment plan to borrowers who have difficulty managing the number or size of their outstanding debts. These are designed specifically for consumers who want to pay down multiple, high-interest debt.

Credit Cards

Another method is to consolidate all your credit card payments into a new credit card. This new card can be a good idea if it charges little or no interest for a set period of time. You may also use an existing credit card’s balance transfer feature especially if it offers a special promotion on the transaction.


Home equity loans or home equity lines of credit (HELOC) are another form of consolidation. Usually, the interest for this type of loan is deductible for taxpayers who itemize their deductions.

Student Loan Programs

The federal government also offers several consolidation options for individuals with student loans. The federal government offers direct consolidation loans through the Federal Direct Loan Program. The new interest rate is the weighted average rate of previous loans. However, private loans are not suitable for this program.

How Debt Consolidation for Bad Credit Works?

As earlier said, debt consolidation involves taking out a new loan to pay off other debts and liabilities. So when a consumer is struggling with different types of debt, they can apply for a loan to consolidate those debts into one liability and pay them off. Payments are then made on the new debt until it is fully repaid.

Most consumers apply for a debt consolidation loan through their bank, credit union, or Credit Card Company. This is a great place to start, especially if you have a great relationship and a good payment history with your institution. If you are refused, try exploring private mortgage companies or lenders.

Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions such as banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the general public.

An important point to note is that debt consolidation loans do not erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan. For actual debt relief or for those who don’t qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.

Debt settlement aims to reduce a consumer’s obligations rather than the number of creditors. Consumers work with debt-relief organizations or credit counseling services. These organizations do not make actual loans but try to renegotiate the borrower’s current debts with creditors.

Qualifying For a Debt Consolidation Loan with Bad Credit

Qualifying for a debt consolidation loan with bad credit can be a challenge. Many lenders won’t make consolidation loans to people with bad credit. That may not make a lot of sense, because you wouldn’t need a consolidation loan if you didn’t have a credit problem. But lenders want customers who will pay them back on time. If you have not been responsible repaying previous loans, credit cards and other debt, they are taking a risk they may not be inclined to take.

Even if you manage to get a loan, consolidation lenders will want assurances that you will repay them. They’ll check your employment history, possibly ask for collateral and demand high-interest payments to offset the risk. If that happens, you might want to reconsider whether a debt consolidation loan with bad credit is the right debt-relief option for you.

However, if you are struggling to get out of debt and think a debt consolidation loan can help, keep in mind that in order to qualify, you will likely have a credit score in the mid-600s, a history of timely payments and sufficient income. Though, every lender has its own requirements. Get started with the following steps to help you find the right loan and boost your chances of approval.

1. Check and Monitor your Credit Score

Lenders base their loan decisions primarily on the condition of your loan. Generally, the lower your credit score, the higher the interest rates that lenders will offer you on financing. To qualify for a debt consolidation loan, you must meet the minimum requirements of the lender. 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 very clearly on their websites.

2. Shop around

It’s rarely a good idea to accept the first loan offer you see. Instead, take your time to 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 part of the 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 check rates with just a soft credit check, which won’t hurt your credit score. However, it may also be worthwhile to check offerings with your existing bank; if you have a good relationship with a bank or credit union, it may be more willing to overlook below-average credit.

3. Consider a Secured Loan

Debt consolidation loans are typically unsecured, meaning they don’t require collateral. But if you’re having a hard time getting approved for an affordable unsecured consolidation loan, a secured loan might be worth considering.

Secured loans require some form of collateral, such as a vehicle, home or other type of asset. The collateral usually has to be worth enough to cover the loan amount in the event that 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.

4. Improve your Credit Score

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 each and 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 meal subscriptions, wine club memberships and fitness apps.

“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, and check for errors. If you find any, you can dispute them with the three credit reporting agencies.

Where to Get a Consolidation Loan with Bad Credit?

If you are seeking a debt consolidation loan, you should consider the options carefully. Some are better than others, and others you should completely avoid. Major Lenders are the best place to start, but they are probably the pickiest in terms of qualifying.

With so many lenders, it can be difficult to decide where to start. Here are some great places to start.

Credit Unions and Local Banks

Local banks and credit unions will typically check your credit when you apply for a personal loan, just like any other lender. Yet these local financial institutions may be willing to offer you more leeway if your credit isn’t in great shape, particularly if you’ve already built a positive relationship with them.

If you’re a customer of a local bank or a member of a credit union, you can talk to a loan officer about whether you qualify for a personal loan (and what the rate and terms are, if you do). The institution may look beyond your low credit score and take into account your entire financial history, personal circumstances and relationship with the bank or credit union.

Online Debt Consolidation Lenders

These businesses will pay off your debts, consolidating what you owe into a single payment which you repay, usually in monthly installments. Like banks, online debt consolidation lenders typically use a risk model to decide whether to accept you as a customer and how much interest to charge.

Usually, they’ll offer several options for consolidating with a bad credit history. The loan amounts vary from $1,000 to as much as $50,000 with repayment terms of 3-5 years. The interest rates typically are very high (25%-35%) for people with bad credit.

Online lenders are good places to look for debt consolidation loans if you have bad credit, as they may be more likely to approve you for a bad-credit loan than a traditional brick-and-mortar bank. With an online lender, you can often:

  • Compare rates without impacting your credit score.
  • Apply quickly and easily, without lots of paperwork or the need to visit a branch in person.
  • Get funds within a week, or even in as little as one business day.

With that said, online lenders frequently charge high APRs for bad-credit debt consolidation loans. You also have to watch out for origination fees that could add to your overall cost of financing and cut into your loan proceeds.

In particular, when reviewing online lenders for a potential debt consolidation loan, it’s important to know whether the company you’re considering is a direct lender or a third-party lender, says Sexton. “Working with a third-party lender can sometimes involve additional costs and fees, so it could benefit you to seek a direct lender to avoid these costs.”

Home Equity Lenders

Homeowners can also use equity in their home as collateral for either a lump-sum loan or a line of credit. They are called home equity loans or home equity lines of credit (HELOCs). Though this is a tempting, straightforward way to raise money for paying down debt, it puts your home at risk. The real estate becomes collateral against default. Lenders also consider your credit score, monthly income and other factors when deciding the terms and what interest rate you’ll pay.

How to Pick the Right Lender for your Debt Consolidation?

Getting a debt consolidation with bad credit can limit your options, but finding a lender is possible. The most important decision is choosing the right lender. First, it’s a good idea to check your credit score to see where you stand, then look for lenders that have lower credit requirements to increase your chances of getting approved.

Even though your options may be limited, you’ll want to shop around and compare lenders to see who will offer you the best rates and terms. Then compare that to what rates you’re currently paying with existing debt to see whether it’s worth it to make the switch.

The lender you choose should help you feel comfortable and knowledgeable about the debt consolidation loan process. You should look for a lender who will tell you in advance about the entire process of obtaining a loan, especially the requirements for obtaining a loan.

Look for debt consolidation loans where lenders consider factors other than credit scores, including job history, income and education. Clarity and visibility are necessary requirements for any financial partner. You should receive documentation on the requirements, rates and costs associated with your loan.

Best Debt Consolidation Loans for Bad Credit

Upgrade: Best Overall

Upgrade is an online lender founded in 2017 and based in San Francisco. We rated it as the overall best lender because it offers competitive rates, fast funding, and the ability to add a cosigner. What also stands out about Upgrade are the tools it has for helping borrowers to monitor their credit and improve their overall credit situation. Rates start at 7.99%, and the maximum amount you can borrow is $35,000.

Other important information:

  • Minimum/maximum amount you can borrow – $1,000 to $35,000
  • Qualification requirements – There is a minimum credit score needed to receive a loan, plus other factors such as income and debts.
  • Repayment period – 36 to 60 months
  • Restrictions – Borrowers need to opt into autopay to receive the lowest rates.
  • Fees – Upgrade charges an origination fee of 2.9% to 8% and a $10 late payment fee.
  • APR range – 7.99% to 35.97%
  • Time to receive funds – You can get your money as soon as the next business day.

Avant: Runner Up

Avant is an online personal loan lender that stands out because of fast funding times, the ability to refinance your loan, and minimal fees. However, it’s our runner up because of its higher starting interest rates—annual percentage rates (APRs) start at 9.95%. As with Avant, borrowers can receive up to $35,000, and there is a prequalification option. This allows you to check whether you are likely to qualify without incurring a hard credit inquiry, which can lower your credit score temporarily.

Other important information:

  • Minimum/maximum amount you can borrow – $2,000 to $35,000
  • Qualification requirements – Most Avant customers have a credit score between 600 and 700. Avant also imposes income requirements to determine how much you can borrow.
  • Repayment period – 24 to 60 months
  • Restrictions – You can only refinance an Avant loan once.
  • Fees – There is a 4.75% administrative fee that comes out of your loan directly. There are also $25 late and $15 dishonored payment fees.
  • APR range – 9.95% to 35.99%
  • Time to receive funds – You can get your money as quickly as the next business day.

First Tech Federal Credit Union: Best Maximum Loan Amount

First Tech Federal Credit Union offers competitive personal loans for less than stellar credit, with rates starting at 7.70%. Though PenFed Credit Union also offers loans from $500 to $50,000, what stands out about First Tech is that its loan terms are longer, with a maximum of 84 months. As with all credit unions, you need to become a member, which you can do by joining the Financial Fitness Association or Computer History Museum.

Other important information:

  • Minimum/maximum amount you can borrow – $500 to $50,000
  • Qualification requirements – First Tech Credit Union will look at income, debts, and whether you have a variable bank account, and you must have reached the age of majority in your state.
  • Repayment period – 24 to 84 months
  • Restrictions – Borrowers need to be a member of the credit union.
  • Fees – $25 for late payments and $28 for returned payments
  • APR range – 7.70% to 18%
  • Time to receive funds – You can receive loan proceeds as quickly as the next business day.

Rocket Loans: Best for Fast Funding

A division of Quicken Loans, Rocket Loans offers debt consolidation loans with rates as low as 7.161% with automatic payments and funding as soon as the same business day. Although it offers a higher minimum loan amount compared with other lenders, you can lower your rate if you sign up for automatic loan payments.

Other important information:

  • Minimum/maximum amount you can borrow – $2,000 to $45,000
  • Qualification requirements – Applicants should have a recommended minimum credit score of 580. There may be other eligibility requirements, such as income and having reached the age of majority in your state.
  • Repayment period – 36 to 60 months
  • Restrictions – Co-signers are not allowed.
  • Fees – There is a 1% to 6% origination fee (deducted from the loan amount) and a $15 late fee.
  • APR range – 7.161% to 29.99% (lowest rate with autopay)
  • Time to receive funds – You can get your money as quickly as the same business day

PenFed Credit Union: Best for Small Loans

PenFed Credit Union offers personal loans that you can use for debt consolidation, with loan amounts starting as low as $500. Rates are competitive, which is rare for loans with a low minimum credit score requirement. Although you do need to become a member to receive funding, doing so is less restrictive than with other credit unions. You can become a PenFed member simply by joining either the Voices for America’s Troops or the National Military Family Organization.

Other important information:

  • Minimum/maximum amount you can borrow – $500 to $20,000
  • Qualification requirements – The recommended minimum credit score of 580 is recommended before applying for a loan. PenFed will also look at other factors, such as your income, plus your co-signer’s credit history and debts if applying with one.
  • Repayment period – Six to 60 months
  • Restrictions – In order for PenFed to fund your personal loan, you’ll need to become a member of the credit union.
  • Fees – There is a $29 late lee, but there are no origination fees or prepayment penalties.
  • APR range – 6.49% to 17.99%
  • Time to receive funds – You can get your money as soon as the next business day.

Frequently Asked Questions about Debt Consolidation Loans

What Credit Score Do You Need to Get a Debt Consolidation Loan?

Typically, the higher your credit score, the better your chances of getting a debt consolidation loan. Even though the lenders on our list require a minimum credit score of either 580 or 600, you may need to meet other requirements, such as a certain annual income and debt-to-income ratio limits, to be approved.

What Is the Best Way to Consolidate Debt?

In addition to shopping around for debt consolidation loans, one of the best ways to be approved for a competitive rate is to add a cosigner. This ideally should be someone with a good credit profile, one better than yours, whom you trust and who understands the responsibilities and consequences of cosigning a loan. Otherwise, you can work to improve your debt-to-income ratio by increasing your income or further paying down your debt before submitting an application.

Are There Alternatives to Debt Consolidation?

Debt consolidation may not be the best option for everyone. If you cannot qualify for a debt consolidation loan with a lower interest rate than you are currently paying, you may want to consider some of these alternatives instead.

Home Equity

This type of loan involves tapping into the equity of your home and can offer a low-interest rate, as it’s a secured loan. One major risk is that you’re putting up your home as collateral, which means that if you fail to repay the loan, you’re at risk of foreclosure.  

Debt Management Plan (DMP)

You can work with a certified credit counselor to lower the fees with your creditors. Then you’ll consolidate your payments, making one payment to your counselor, who will then pay your creditors. This may save you money, but most counselors charge a monthly fee. Also, a DMP takes a few years to complete.


Filing bankruptcy can help you with canceling your debt or negotiating a deal with your creditors. However, you’ll damage your credit, making it much harder to be approved for certain loans in the future.

Debt Settlement

Debt settlement goes one step further than debt management. Debt settlement companies like National Debt Relief and Freedom Debt Relief work with you in order to settle your debt for less than what you owe.

The caveat is that you typically need to pay enough into an account with the debt settlement company before it will begin negotiations with your creditors often at the expense of making your regular monthly payments, forcing you to default.  If you default on your debts, it could damage your credit score even further, which can take a long time to rebuild.


Regardless of how you get rid of debt, it’s important to have a plan to achieve your goal. However, keep in mind that debt consolidation loans are a temporary solution. They don’t solve the basic problem of how you ended up in debt at all.

If you choose a debt consolidation loan, be sure to take additional steps towards financial stability, such as budgeting, limiting your overspending, and looking for additional income opportunities. You should also avoid accumulating new account balances that you have just paid off.

Remember to compare lenders to find the debt consolidation loan for you. Look at several lenders and compare interest rates, origination fees, and other terms. Take a close look at the situation so you can choose the loan that will work best for you.

We hope you will find this information useful. Do you have any queries on Debt Consolidation for Bad Credit? Please feel free to let us know so we can assist you with any information you will need.

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