Can I get a Debt Consolidation Loan with Bad Credit?

If you’re managing multiple debts or have a high interest credit card debt you’d like to refinance at a lower rate, a debt consolidation loan can be a great option. Consolidating your bills into one monthly payment with a lower interest rate can help you stay on top of your monthly payments and get out of debt sooner. If used properly, debt consolidation can also improve your credit score. If you have below average or poor credit, you can likely still qualify for a debt consolidation loan, but your options will be more limited. 

In general, a low credit score will result in lenders charging you high interest rates. Your odds of being approved for high quality loans will improve if you spend some time working to boost your credit score before applying. 

A credit score above 660 is considered good. A good credit score will help you qualify for debt consolidation loans from top-rated lenders. 

A credit score below 660 is considered below-average. With a below-average credit score, you might not qualify for a debt consolidation loan from the highest-rated banks or financial institutions. That said, there are alternative lenders who offer debt consolidation loans to people with below-average credit. 

A credit score below 574 is considered bad or poor credit. If you have a bad credit score, your loan options will be limited. It may be difficult to get a debt consolidation loan, let alone one with favourable terms. In this scenario, it may be best to wait and work to improve your credit score before applying. 

How Do I Qualify for a Debt Consolidation Loan with Bad Credit?

Here are specific steps you can take to help you qualify for a debt consolidation loan.

Check, monitor, and improve your credit score

The number one factor lenders look at before approving you for a personal loan is your credit score. To qualify for a loan with any given lender, you’ll have to meet their minimum requirements. Review your credit report regularly to ensure there are no errors negatively impacting your score. 

If you apply for a loan with bad credit, alternative lenders might look at additional factors to qualify. That said, the best way to increase your approval chances for a loan with bad credit is to spend a few months working to improve your credit score. 

You can sign up for free with Borrowell to check and monitor your credit score. Borrowell’s AI-powered credit coach will also give you personalized tips on how to improve your score. 

Shop around with multiple lenders

Once you know where your credit stands, compare terms offered by a variety of lenders so that you get a sense of what debt relief options are available to you. Do your research and compare interest rates, fees, terms, and conditions. Credit unions and alternative lenders may be more flexible with their terms, potentially saving you hundreds or thousands of dollars over the lifetime of the loan.

When you are shopping around online, you can often check rates simply by pre-qualifying. This is considered a soft credit check and won’t impact your credit score. A loan application is a hard inquiry and will affect your credit score. Don’t apply for a loan with bad credit until you’ve done your research, know that you meet the lenders minimum requirements, and are confident that the loan terms are a good fit for you.

With the Borrowell platform, you only see loan offers that you are likely to qualify for based on your credit score. This will help you quickly compare interest rates and offers without applying for loans and impacting your credit score.

Look at a secured loan

Most debt consolidation loans are unsecured, like the majority of credit cards, meaning you don’t have to put up any collateral to qualify. If you’re having a hard time qualifying for an unsecured loan with bad credit, you may want to consider applying for a secured loan. Putting up an asset as collateral, such as a car, may help you get approved for a secured loan with bad credit.

If you decide to get a secured loan, be sure that you can make the minimum payments. If you’re unable to make minimum payments on time, the lender is allowed to seize the asset you secured the loan with as payment.  

Improve your credit to qualify for a better loan

If you’re not in a financial emergency and can handle the minimum payments of your debts for a little while longer, work to improve your credit score so that you can avoid high interest rates in the future. Redirect all non-essential spending to pay down your debts, prioritizing high interest credit card debt first. Taking a few months to increase your score will drastically improve the quality of loans available to you. This can save you hundred or thousands of dollars in interest over the lifetime of your loan.

Where Can I Get a Debt Consolidation Loan with Bad Credit?

If you have below average or poor credit, you might not qualify for a debt consolidation loan at a bank or another traditional, major financial institution. Look at credit unions or alternative, online lenders to see what they offer for those with below average credit scores. When comparing, carefully read all fees and terms so that you know exactly what the loan will cost you.

You can use the Borrowell platform to compare personal loan offers from lenders across Canada. These offers are recommended to you based on your credit score and your likelihood to qualify for these loans.

What Else Should I Know When Shopping for a Debt Consolidation Loan with Bad Credit? 

When shopping around for a debt consolidation loan, be on the lookout for predatory lenders and payday loans. Lenders that offer loans to people with bad credit can have unreasonably high interest rates and unfavourable, often hidden terms. These lenders are considered predatory in nature. Because the annual percentage rates (APRs) on these loans are so high (double or even triple digits) and the penalties for late payments are so tough, people can find themselves deeper in debt after taking one. 

Predatory lenders can be hard to spot, so be sure to read the fine print of any loan offer. Do not accept a loan without fully understanding all the current and potential costs associated with it (i.e. what happens if you’re late with a payment or what happens if you want to pay it off early). 

What Other Factors Determine if I Qualify for a Debt Consolidation Loan?

Alternative lenders will sometimes look at factors other than your credit score to determine your eligibility for a personal loan. They may look at your credit report, payment history, income, or recent efforts to improve your credit score to evaluate how likely you are to repay a loan.

If you have a long history and good relationship with your bank or credit union, they may be willing to overlook a credit score that doesn’t meet their minimum requirements and offer you a loan. It could be worth asking.

What Should I Do If I Don’t Qualify for a Debt Consolidation Loan?

If you don’t qualify for a debt consolidation loan and you’re struggling to keep up with the minimum monthly debt payments, you can contact a credit counsellor to help you develop a repayment plan and negotiate with your creditors. They can provide you with debt management and debt relief advice to help you gain back control of your finances. Talking to a credit counsellor won’t affect your credit score.

If you’re in a financial emergency, consider working with a licensed insolvency trustee. An insolvency trustee is licensed by the federal government to handle consumer proposals and bankruptcies. These are both legal processes to help you get out of debt.

What Else Can I Do to Get Out of Debt?

There are other strategies and tactics you can use to help you get out of debt with low income. Here are 3 action items to consider:

1. Review your budget

Review your budget to see where and when money is coming in and going out each month. Review your current monthly spending, including credit card bills, recurring subscription fees, and other monthly expenses, to see if there’s anywhere you can cut back. Remember that these cutbacks are temporary and to help you allocate your money strategically while you’re paying off debt.  

2. Negotiate with your lenders

Contact your current lenders to renegotiate your payment terms. If you’re struggling to meet your minimum debt payments, they may work with you to lower your interest rate or change your payment due date. Changing your payment due date to better align with when you get paid can help you manage your cash flow and ensure cash is available to pay bills when they are due.

3. If you have a home, consider a home equity line of credit (HELOC)

If you own a home, you may be able to take out a home equity line of credit (HELOC) to consolidate your debt. While a HELOC isn’t a debt consolidation loan, it is a way to access a loan that you can then use to pay off your existing debts. A HELOC is often offered at a lower rate than a personal loan since it is secured by an asset, your home. That said, only consider a HELOC as a debt relief option if you’re absolutely confident that you’ll be able to keep up with the payments. If you can’t keep up with the payment schedule, you risk losing your home. 

The Bottom Line

A debt consolidation loan can help you consolidate multiple debts into one monthly payment with a lower interest rate. This will allow you to manage your debt  and pay it off sooner. The number one thing you can do to improve your likelihood of being approved for a debt consolidation loan is to improve your credit score. Sign up for Borrowell today to check your credit score for free, get personalized tips on how to improve your score over time, and find debt consolidation loan offers that you’re likely to qualify for based on your score.