How to Get a Debt Consolidation Loan With Bad Credit - Experian (2024)

What Is Considered a Bad Credit Score?

A bad credit score is one that falls below 670, which is classified as either fair or poor according to FICO® Score☉ , the credit score used by 90% of top lenders. FICO® Scores range from 300 to 850 and break down as follows:

• Poor (300 to 579): Having a FICO^® Score in this range generally makes it difficult to get approved for a consolidation loan or other credit products. If a lender does approve your loan with a credit score in this range, be prepared to pay higher interest rates.
• Fair (580 to 669): Lenders may consider applicants with fair credit as subprime borrowers and only approve you for a loan with a substantially higher interest rate than would be available to someone with good or exceptional credit.
• Good (670 to 739): According to 2022 data from Experian, the average credit score in the U.S. is 714, which falls squarely in the good credit score range. Borrowers in this credit range are generally responsible with credit, with only 8% deemed likely to become delinquent on a bill.
• Very good (740 to 799): One-quarter of consumers fall into this category, with credit scores that usually make them eligible for above-average rates.
• Exceptional (800 to 850): With a credit score of 800 or higher, you'll find easier approval on loans, credit cards and other credit products. You're also likely to be offered the best rates available to applicants for any given credit product.

What Are the Benefits of a Debt Consolidation Loan?

Managing multiple debt accounts can be challenging and even overwhelming. A debt consolidation loan could simplify your budget and even save you money on monthly payments. Here's a look at how you might benefit from a debt consolidation loan.

Streamlines Your Finances

One of the main advantages of a debt consolidation loan is that it can eliminate the task of paying multiple lenders each month. When you consolidate all your existing debt into one new loan, you only have to make payments to your new lender or lending platform. Making only one payment is not only easier, but it can save you from dealing with late and missed payments—which can occur when juggling multiple payments each month.

May Save Money

Another advantage of a debt consolidation loan is the ability to lower the amount of interest you're paying on your outstanding debt. People typically use debt consolidation loans to pay off their high-interest debt—like credit card debt, which averages 20.92% APR in the U.S. and can run much higher. Depending on your creditworthiness, a debt consolidation loan will have a much lower interest rate, which can save you money on interest over the life of your loan and even lower your monthly payment.

Can Accelerate Your Debt Payoff Timeline

Unlike credit cards and other types of revolving credit, personal loans have a fixed repayment schedule with a definitive date when the debt will be paid off. If you can swing the higher payments, you could apply for a short-term consolidation loan with a term length of just a few months. Not only would you zero out your debt fast, but you could also save money on interest.

Can Potentially Help You Improve Credit

Payment history is the most important factor in calculating your credit score—accounting for 35% of your FICO^® Score—and it is important to avoid missing any loan payments. Using autopay or setting up automatic notifications that alert you that your loan payment is due can help make sure you don't miss a payment.

How to Qualify for a Debt Consolidation Loan

Qualifying for a debt consolidation loan with poor credit can be challenging, but your credit is only one of the factors lenders consider when reviewing your loan application. Here are the most common debt consolidation loan requirements for this type of personal loan:

• Strong credit: A credit score of at least 670 improves the likelihood of loan approval with attractive interest rates. If your credit is less than stellar, consider adding a cosigner or working with an online lender or credit union with more flexible eligibility criteria.
• Solid history of on-time payments: Lenders review credit reports to see how you've managed your credit and if you've made timely payments on your debt accounts. A credit history that includes several late or missed payments can severely lower your credit score.
• Sufficient income: Lenders and lending platforms must be able to see you have enough income to repay the loan, and many set minimum annual income requirements. For example, LendingPoint personal loans require at least $35,000 in annual income from employment, retirement or elsewhere, while Upstart's minimum income requirement is only $12,000.
• Low debt-to-income-ratio: One way lenders determine if you can take on a new loan is by considering your debt-to-income ratio (DTI). This ratio compares how much of your gross monthly income goes toward your total monthly debt payments. Lenders typically prefer a DTI below 36%, but some will approve borrowers with higher ratios.
• May require collateral: Most personal loans don't require collateral, but secured loans do, typically something of value like cash savings or a car. Since secured loans pose less risk to a lender, qualification may be easier and your interest rate may be lower. But be aware you could lose your collateral if you fail to keep up with payments.

Alternatives to Debt Consolidation

While debt consolidation loans can be beneficial, they're not your only option. Before proceeding, consider other alternatives to pay down your debt, such as:

New Budget

Making a budget and tracking your expenses is crucial to determining how much you can afford to pay toward existing debt each month. With a workable budget, you can set aside a set amount toward your debt payments and inch toward your goal of eliminating your debt. If you don't have a budget or your current one doesn't allow you to put more toward your debts, create a new one.

Credit Card Balance Transfer

If you have good credit, you may save substantially on interest by transferring your high-interest credit card balances to a card with a lower interest rate or a promotional 0% APR period. Some cards offer introductory periods of up to 21 months, allowing you plenty of time to pay down debt interest-free.

Home Equity Loan or HELOC

If you have a home with equity, you could pull out a portion of it to pay off debt through a home equity loan or home equity line of credit (HELOC). Home equity loans offer a lump-sum payment you must repay over five to 30 years at a fixed interest rate. By contrast, a HELOC gives you an open line of credit you can draw from multiple times as needed up to your credit limit.

Debt Repayment Strategies

A good debt reduction plan can provide a roadmap to eliminating debt and help you track your progress. The most common repayment strategies are the debt avalanche and debt snowball methods. In both cases, the idea is to make minimum payments on all your debt payments but prioritize one account with higher payments. The debt avalanche method has you focus on paying off the account with the highest interest rates first and repeat the process until your debts are paid off. This strategy can help you save money in interest charges over time. Conversely, the debt snowball method prioritizes paying off your accounts with the lowest balances to create quick wins and build momentum.

Credit Counseling

If you are overwhelmed with debt and need help finding a way to pay it off, credit counseling may help. A nonprofit credit counselor can work with you to strategize debt payoff and may recommend a debt management plan (DMP). With a DMP, your credit counselor helps you determine how much you can put toward your debt each month and attempts to negotiate reduced interest rates fees with your creditors. You make one payment to the credit counselor, who then distributes it to your lenders until your debts are paid off.

Improve Your Credit—and Your Options

While you may qualify for a debt consolidation loan with bad credit, you'll likely pay more in interest rates. By taking a few months to improve your credit, you could boost your odds of approval for debt consolidation loans and other types of credit and with lower interest rates. Even reducing your interest rate by a point or two could save you hundreds or even thousands of dollars over the life of the loan.

Consider reviewing your credit report and credit score for free with Experian. Once you have a clear picture of your current credit profile, you'll better understand what improvements you must make to achieve a good or excellent credit score.