Ready to say goodbye to student loan debt for good? Learn More

How To Get a Debt Consolidation Loan if You Have Bad Credit

Upsolve is a nonprofit that helps you get out of debt with education and free debt relief tools, like our bankruptcy filing tool. Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card.  Explore our free tool

In a Nutshell

If you’re struggling to pay off your debt, there are various forms of debt relief available. One common type is debt consolidation, combining two or more debts into a single account to make the debts easier to manage and to save money on interest payments. But, getting a debt consolidation loan can be difficult if you don’t have good credit or a high FICO score. That said, there are still multiple debt consolidation loan options for you to consider. Read on to learn more.

Written by Curtis Lee, JD
Updated July 25, 2023

If you’re struggling to pay off your debt, there are various forms of debt relief available. One common type is debt consolidation. This involves combining two or more debts into a single account. The goal is to make the debts easier to manage and to save money on interest payments.

There are several ways to consolidate your debt, but one of the most popular is a debt consolidation loan. Getting a debt consolidation loan can be difficult if you don’t have good credit or a high FICO score. That said, there are still multiple debt consolidation loan options for you to consider. Read on to learn more.

What Are Debt Consolidation Loans? 

Debt consolidation involves rolling multiple debts into a new debt account. These debts can come from a variety of sources are typically unsecured debts, like credit card debt, student loans, and medical bills. In a best-case scenario, borrowers can reduce the number of bills they pay each month, lower their monthly payments, and obtain a lower interest rate for their consolidated debt. 

There are numerous ways to consolidate debt, but they can be broadly categorized into two major groups: debt management plans (DMP) and debt consolidation loans. Each has its pros and cons.

In a DMP, a credit counseling agency works on the borrower’s behalf to negotiate a payment plan with their lenders. Credit counselors aim to lower the borrower’s monthly payments and save them money by getting lower interest rates. If the lenders agree to a DMP, the borrower will make a single, large monthly payment to the credit counseling agency. This agency then divides that payment and passes it on to each creditor participating in the DMP.

There are two kinds of debt consolidation loans: secured loans and unsecured loans. 

Secured Debt Consolidation Loans

Secured debt consolidation loans are backed by collateral, most commonly a home or property. The common types include:

  • Second mortgage or home equity loan: A borrower receives a lump-sum loan by using their home (which is still subject to the first mortgage) and its equity as collateral. The second mortgage gets paid back over time with a fixed or variable interest rate. A home equity loan is a type of second mortgage.

  • Home equity line of credit (HELOC): A HELOC is similar to a home equity loan or second mortgage. The primary difference is that instead of receiving a lump sum that gets paid back in installments, the borrower receives a line of credit for a period of time. They can tap into this account, make payments, then borrow again if they wish. A HELOC is a revolving line of credit, so it works like a credit card.

  • Mortgage cash-out refinance: With this option, an existing mortgage gets paid off with the proceeds from a brand-new mortgage. This new mortgage will usually have a different repayment term and interest rate. It’s also usually for an amount above what’s needed to pay off the original mortgage. The borrower can then use these extra funds to pay off multiple debts.

Unsecured Debt Consolidation Loans

Unsecured debt consolidation loans don’t require collateral. Because of this, they are riskier to lenders. This is why lenders will look into your finances, credit history, and credit score to determine your eligibility and interest rate. Here are three common types:

  • Credit card balance transfer: Credit card users can move one or more credit card balances onto a new credit card account. This new account will often have better terms, like a low or 0% interest rate for a limited time.

  • Personal loan: A borrower can ask a bank or other financial institution for a lump sum of money that gets paid back over time, with interest.

  • 401(k) loan: An individual can borrow a portion of their 401(k) retirement account balance. The amount borrowed gets paid back over the next few years, with interest. If the debt isn’t fully paid back in time, the borrower can face tax consequences and an early withdrawal penalty.

Debt Consolidation Loans and Credit Scores

You might be wondering if there’s a particular credit score that guarantees you’ll get approved for a debt consolidation loan or get one with the terms you prefer. Unfortunately, there’s no universal formula that promises you’ll get the loan offers you’d like. As you might imagine, the higher your credit score, the easier it’ll be to get a loan or get a loan with more favorable terms, such as a higher loan amount or lower interest rate.

In addition to your credit score, lenders consider other factors when deciding to approve or reject you for a debt consolidation loan. These include your overall credit history, income, and existing debt load. Lenders will take these factors and apply them to their internal formulas to decide your debt consolidation loan request. 

You can always contact lenders and ask them about their credit score requirements. Just keep in mind that each lender has its own formula for making credit decisions and each weighs different factors differently. But you can still get a rough idea of whether you’re likely to get approved and, if so, what the interest rate might be.

Pros and Cons of Debt Consolidation Loans

Debt consolidation loans are great tools for getting out of debt. But they’re not right for everyone. For most borrowers, debt consolidation loans will have the following advantages:

  • They can help you improve your credit score by decreasing your credit utilization rate and allowing you to establish a history of on-time payments.

  • It’s possible to save money in the long run with lower interest rates.

  • They can lower your overall monthly debt payments. Though it may take longer to pay off your debts, having a lower monthly debt payment means you’re less likely to default.

  • Because you have a simplified debt payment schedule and fixed monthly payment, you’re less likely to be surprised by a debt payment amount or have missed or late payments.

But there are disadvantages to using debt consolidation loans as a form of debt relief, including:

  • Extending the term of your loan will lower your monthly payment and make it more affordable for you, but it can also be more expensive in the long run since you’re paying for more months or years.

  • You may not qualify for a large enough loan to pay off all of your debt. And if you do qualify, you may not be able to afford the monthly payment.

  • Lenders will run a hard credit check, which could ding an already bad credit score.

  • Getting a debt consolidation loan or using a DMP can cost money. You may have to pay monthly DMP fees, balance transfer fees, or loan origination fees.

  • Missing a payment or two on a DMP or debt consolidation loan could set you back even further in your quest to becoming debt-free.

If you decide that the drawbacks of debt consolidation loans outweigh the benefits, you can still look into a DMP or other tools for getting out of debt. To learn more about these options and how they may work for you, schedule a free credit counseling session with an accredited, nonprofit credit counseling agency. You’ll have the opportunity to explain your financial circumstances to a credit counselor who can then advise you on the best course of action.

Considerations When Applying for a Debt Consolidation Loan 

If after giving a debt consolidation loan some thought, you decide to apply for one, you’ll first want to find out what your credit score is. This is important because it can give you a rough idea of whether you’ll get approved for the loan and if so, what sort of terms you can anticipate.

It’s also a good idea to get a copy of your credit report. You can get a free report once a year from each of the three major credit bureaus (Experian, TransUnion, and Equifax). This will show your credit history, which is what lenders look at when they consider you for a loan. It also allows you to find any reporting errors that can hurt your credit score. If you find a mistake, you can file a dispute with the credit bureau.

Once you know what your credit score is and have ensured the accuracy of your credit history, you’re ready to apply for a debt consolidation loan. But as you apply, keep the following points in mind.

Your Debt-to-Income Ratio Is Vital

In addition to your credit score, your debt-to-income ratio is one of the most critical factors lenders will consider when evaluating your debt consolidation loan application. Lenders calculate your debt-to-income ratio by dividing your total monthly debts by your monthly gross income. 

Before you apply for your loan, do everything you can to improve your debt-to-income ratio. You can do this by increasing your income or by lowering your debts. This is easier said than done, but there are a few things you can do to shift this ratio in your favor:

  • Increase your monthly payments to pay down existing debt.

  • Postpone any large purchases until after you receive your debt consolidation loan.

  • Ask for a pay raise at work.

A Co-Signer Can Help 

Lenders look at your credit score and debt-to-income ratio to decide how likely you are to pay off the loan you’re asking them for. If these two factors aren’t the best, you can have someone with better credit co-sign the loan with you. This lowers the lender’s risk and makes them more likely to approve your loan. That’s because if there’s a default, the lender can try to recover the money from both you and your co-signer. 

There’s no universal rule about who can be your co-signer. It can be a spouse, family member, friend, or work colleague. But it should be someone who has a good enough credit history that it will improve your chances of approval. You should also consider what might happen to your relationship with this person if they need to step in and help you pay back the loan.

A Secured Loan Is Another Option 

If you recall from earlier in this article, debt consolidation loans can be unsecured or secured. Secured loans mean there’s collateral the lender can recover if the borrower defaults. It’s a kind of insurance for the lender. That’s why, all else being equal, a secured debt consolidation loan will have a lower interest rate and be easier for someone with poor credit to get.

Almost any property of substantial value can serve as collateral for a loan. But the best type of collateral to use is real estate because real estate values tend to rise over time. This increases the chances the lender will get fully repaid if you default. 

If you use something other than real estate as collateral — like a car, boat, or RV — some of the advantages of a secured loan are diminished. Because these forms of collateral usually lose value over time, lenders will often offer these loans with high interest rates, at least compared to secured loans that have real estate as collateral. These rates could be high enough that getting a secured loan isn’t financially worth it.

Upsolve Member Experiences

1,990+ Members Online
Silas Path
Silas Path
★★★★★ 51 minutes ago
Easy to use and answered all my questions
Read more Google reviews ⇾
chris berger
Chris Berger
★★★★★ 1 day ago
Upsolve makes the process so easy!
Read more Google reviews ⇾
Teresa Logan
Teresa Logan
★★★★★ 4 days ago
Thank you for assisting with the paperwork! It was easy!
Read more Google reviews ⇾

Where To Get a Debt Consolidation Loan if You Have Bad Credit 

It’s time to apply for a debt consolidation loan, but where should you apply given your less-than-stellar credit history? There are several possibilities, so it’s good to shop around and compare loan terms and interest rates from various lenders before obtaining the consolidation loan.

Credit Unions

Credit unions are similar to banks, except they’re nonprofit financial institutions owned by their account holders. Due to these differences, they often offer customers more favorable loan terms than they could get at a regular bank. This means you’re more likely to get approved for a loan and to get one with a lower interest rate. For instance, federal credit unions can’t charge you more than 18% interest for most loans they offer.

Before you apply for a loan at a credit union, you’ll need to become a member. You can do that as long as you’re within the credit union’s field of membership. This means you’re part of a group or geographical area that the credit union serves. Many credit unions will also allow family members of an existing member to join.

Online Lenders 

Online lenders have a few advantages when it comes to loans. First, they often complete the loan process more quickly than brick-and-mortar banks. Often, you can apply for a loan and, if approved, receive your money in just a few days. Second, they sometimes charge lower fees or interest rates because they have lower operating costs. Third, their prequalification process will have less of an impact on your credit.

But there are some potential pitfalls with online lenders. Namely, they’re more likely to charge loan origination fees. They also sometimes charge borrowers with poor credit higher interest rates than credit unions do.

Small Banks

The biggest advantage of using a small bank to get a debt consolidation loan is that they usually have more flexibility in their loan requirements and approval process. A national bank might have strict credit score or debt-to-income ratio cutoffs requirements. Anyone who doesn’t meet either requirement may automatically be denied. But a small bank might not have such strict requirements. 

Debt Management and Debt Relief Alternatives 

If a debt consolidation loan isn’t for you, there are other debt relief options available. Assuming you still feel debt consolidation is best for you, you can look into starting a DMP. If you’d rather step away from debt consolidation altogether, you can consider other forms of debt management.

One of the most basic is budgeting. This is a financial plan where you look at your expenses and income to help you reach your financial goals. There are different ways to budget, but the simplest involves comparing your income with your expenses, then making adjustments so that what you’re earning is larger than what you’re spending. Besides helping you compare your income with expenses, budgeting also offers the opportunity to help you “find” extra money to help you pay off your debts.

For example, after you list out your expenses, you can carefully review them and determine which ones are true needs and which ones are wants. You may also find ways to lower, but not eliminate, your expenses by reassessing your financial situation.

You might conclude that broadband internet is a necessity. But paying extra for the ultrafast connection might be a want. Or perhaps you can lower your car insurance premium if you raise your deductible. These are just a few examples of how you can identify new sources of cash without having to increase your income or completely eliminate certain expenses.

Another form of debt management is creating a debt repayment plan. There are two popular debt repayment methods:

  • Debt snowball: This requires you to pay off your smallest debt first. After that’s paid off, you pay off your second smallest debt. You repeat this process until all your debts are paid.

  • Debt avalanche: The first debt you pay off is the one with the highest interest rate. Once that’s paid, you move on to paying off the next debt with the highest rate, and so on. 

If none of the above methods seem like they’ll work for you, or if you’re feeling overwhelmed, don’t forget you can talk to a credit counselor. They often have free consultations that can give you better insight into your financial situation. 

Finally, as a last resort, you can file bankruptcy. This will destroy your credit, but it allows you to get a clean financial start. And over time, you can rebuild your credit. For most individuals, there are two types of bankruptcy to consider: Chapter 7 and Chapter 13. They each have their benefits and drawbacks, as well as their own eligibility requirements and rules about what debts can be discharged. You don’t need to hire an attorney to file bankruptcy, but it may help to have one. If you have a simple Chapter 7 case, Upsolve can help you file for free.

Let's Summarize... 

Debt consolidation is a popular form of debt relief that combines two or more debts into a single account. This makes it easier to keep up with your debt payments and in many cases, allows you to reduce your monthly payment. You may also save money in the long term with lower interest rates.

There are two main ways to consolidate your debt: Enroll in a debt management plan or apply for a debt consolidation loan. There are many different types of debt consolidation loans, even if you have a rough credit history and bad credit score. Though you may not get a debt consolidation loan with the best terms, you can get an offer that makes it easier and cheaper to pay off all your debts.

Written By:

Curtis Lee, JD


Curtis Lee is a writer and co-owner at Marvel Hill Freelance. Curtis earned his Bachelor of Science in Business from Wake Forest University and his Juris Doctor (JD) from Villanova University School of Law. After graduating law school, Curtis had the honor of clerking for a stat... read more about Curtis Lee, JD

It's easy to get debt help

Choose one of the options below to get assistance with your debt:

Considering Bankruptcy?

Our free tool has helped 13,539+ families file bankruptcy on their own. We're funded by Harvard University and will never ask you for a credit card or payment.

Explore Free Tool
13,539 families have filed with Upsolve! ☆

Private Attorney

Get a free evaluation from an independent law firm.

Find Attorney

Learning Center

Research and understand your options with our articles and guides.

Go to Learning Center →

Already an Upsolve user?

Read Support Articles →

Upsolve is a 501(c)(3) nonprofit that started in 2016. Our mission is to help low-income families resolve their debt and fix their credit using free software tools. Our team includes debt experts and engineers who care deeply about making the financial system accessible to everyone. We have world-class funders that include the U.S. government, former Google CEO Eric Schmidt, and leading foundations.

To learn more, read why we started Upsolve in 2016, our reviews from past users, and our press coverage from places like the New York Times and Wall Street Journal.