Debt Consolidation Loans for Bad Credit in September 2024

Is your credit not where you want it to be? Debt consolidation loans for bad credit may be your ticket to rebuilding your finances.

Credit card debt in the United States has grown to $1.14 trillion in 2024. Additionally, the average interest rate for a credit card has now reached 27.8%.

You also can’t forget that many households are balancing mortgages, auto loans and student loan debt. With so many individual payments, it’s no wonder some people miss or accidentally skip them. 

A debt consolidation loan could help.

What Is a Debt Consolidation Loan?

A debt consolidation loan is a personal loan that borrowers use to pay off multiple high-interest debts with various creditors. Because those debts are paid in full, borrowers can then focus on only repaying their debt consolidation loan with a single monthly payment. This, ideally, also comes with a lower annual percentage rate (APR).

Unliked credit cards, which operate with revolving credit, debt consolidation loans are designed as installment loans. So what’s the difference?

Revolving Credit

Credit cards give borrowers a set amount of money to borrow, usually each month. This credit limit can be used repeatedly, so long as you continue to pay down at least part of the balance. 

You don’t have to pay off your credit card balance in full in any given month. As long as you make the minimum monthly payment, you can carry that debt from month to month. However, you will be charged interest on that debt, which increases what you owe. 

Installment Loans

Installment loans (think mortgages, auto loans, or personal loans like debt consolidation loans) give you a lump sum at the start of the loan. Then you have to make a payment (an installment) each month until that loan is paid off.

For personal loans, that monthly amount typically does not change over the life of the loan. You and the lender will agree on a monthly payment and loan term (a set number of years) at the start of the loan. Like a rent or mortgage payment, you must pay the installment in full each month. If you miss a payment, you could default on the loan.

How To Qualify for a Debt Consolidation Loan With Bad Credit

To get a debt consolidation loan, lenders will review your credit history, current income and debt-to-income ratio (DTI). Some lenders have stricter credit score requirements, only giving out debt consolidation loans to those with 650 scores or higher.

But what if your score is lower? 

On the FICO Score scale (the one most commonly used by lenders), bad credit is a score below 670. This encompasses both fair credit (580 to 669) and poor credit (300 to 579).

You can find some loans even with a lower credit score (more on that below). Because borrowers in need of debt consolidation loans are generally struggling with lower credit scores, some lenders offer loans at a lower credit threshold. Just be prepared for a higher interest rate and limit on how much you can borrow.

Lenders typically advertise personal loan APRs as a range. The low end of the range is usually an attractive number between 3% and 7%, but the high end of the range might be as high as 35.99% (or sometimes more). Bad credit borrowers should expect their interest rate to fall on the higher end.

You may also have to accept smaller loans. While a lender may generally approve personal loans up to $50,000, a bad credit borrower might only be granted $25,000 — or even less. Depending on how large your debt is, you may not be able to pay off all your outstanding balances with a debt consolidation loan. If that’s the case, prioritize paying off debts with high interest rates first.

You should also have enough money for fees. Most lenders charge an origination fee upfront. This is like a “closing cost” for your loan and can be as high as 10% with some lenders. If you don’t have the cash to cover an origination fee, you may struggle to get a loan.

Another thing to consider when applying for a debt consolidation loan with bad credit: There will be an immediate negative effect on your credit score. While this is usually temporary, the lower score can be problematic if you apply for additional credit or loans later.

Best Debt Consolidation Loans for Bad Credit

So, you know what it takes to qualify for debt consolidation loans, but where do you start your search? Here are a few places to look for debt consolidation loans for bad credit.

Banks and Credit Unions

Often, borrowers will find the best debt consolidation loans at local or online banks and credit unions. When borrowers already have a history with their banks or credit unions, they’re more likely to get approved for a loan.

If you are a member of a physical bank or credit union, schedule an appointment to talk with a loan officer about your options. You should be able to have an informal conversation without impacting your credit score. They can let you know what rates and terms you may qualify for.

If you bank exclusively online, most online financial institutions offer personal loans. You can chat online or through the bank’s mobile app, but you’ll learn more by calling and speaking with a customer service representative.

Online Lenders

Today, the market is saturated with online lenders willing to offer loans for bad credit borrowers. These lenders run the gamut from highly respected, trustworthy institutions to shadier lenders known for easy approvals but high interest rates.

We recommend sticking with lenders with strong ratings on sites like Better Business Bureau and TrustPilot. In fact, we have a list of the best personal loans for fair credit (580 to 669), which is a good place to start your research.

All of the lenders on our list allow early payoff without prepayment penalties, and all but one (Navy Federal) allow you to pre-qualify without a hard credit inquiry.

Upstart

Upstart is the best overall fair credit loan. It’s great not just for borrowers with fair credit but also for those with poor credit or no credit history at all.

Upstart approves loans for borrowers with bad credit as low as 300 (the minimum credit score), but they’ll also consider borrowers who have nothing on their credit report.

We also like the small loan amounts and next-day funding offered by Upstart.

Upgrade

Like Upstart, Upgrade caters to all bad credit borrowers, not just those with fair credit. Upgrade considers credit scores as low as 560 and promises next-day funding. You can get a loan as small as $1,000 through Upgrade.

Rocket Loans

Rocket Loans can do same-day funding, but the minimum credit score requirement is on the higher end: 640. We like that APRs top out under 30%, too.

Discover

Discover doesn’t charge an origination fee. But for the lack of origination fees and lower max APR (24.99%), you’ll need a stronger credit score.

Discover does not disclose its minimum credit score requirement. It does consider annual income and DTI when making its decisions. Though Discover has been known to award loans for bad credit borrowers, these loans are harder to come by.

LendingClub

With a minimum credit score requirement of just 600, LendingClub is one of the more attainable debt consolidation loans. You can get a loan as small as $1,000 through LendingClub, where the average APR is 15.95%. 

Best Egg

Best Egg continues to impress because of its great customer satisfaction scores. Though the max APR is high and we’re not in love with the origination fees, we appreciate how easy it is for borrowers with bad credit (minimum score of 600 required) to get a loan as small as $1,000 to consolidate debt.

Navy Federal Credit Union

No origination fees and a low max APR (18%) make debt consolidation loans from Navy Federal appealing. The downside? You must be a member of the credit union, and you can’t get pre-qualified. That means your credit score will take a hit when you seek approval.

Avant

Avant has one of the lowest minimum credit score requirements (580) and can promise next-day funding. The APRs tend to be high, however, and the flat 4.75% administration fee can be a barrier.

LendingPoint

LendingPoint also has a 580 credit score requirement and an easy application process. This requirement is easier to meet for borrowers with bad credit, but the APR and origination fees will likely be high.

Pros and Cons of Debt Consolidation Loans for Bad Credit

If you are struggling with credit card debt, you’ll find several advantages with a debt consolidation loan. You’ll have a single monthly payment, a lower interest rate than with credit cards and the opportunity to raise your credit score as you pay off the loan.

Pros of Debt Consolidation Loans

You Get a Single Payment

Late fees are no joke. 

And while calendar apps, reminders and automatic payments can certainly keep you honest, you could miss a payment and get hit with a late fee if you try to juggle too many individual payments. If you take out a loan to consolidate all your debts, you’ll only have to worry about one monthly payment. 

There’s a Lower Interest Rate

If you have multiple credit cards with APRs ranging from 20% to 40%, you’ll likely be able to get a lower interest rate on a single debt consolidation loan. Doing this could save you thousands — or, in some cases, tens of thousands — over the life of your loan.

Your Credit Score Can Improve

When you first apply for a debt consolidation loan, your credit score may drop a few points. But paying off multiple credit cards and then making regular, on-time payments on your debt consolidation loan over time will actually boost your score.

If the debt consolidation loan proves successful and gets you out of debt, your credit utilization will go way down and your credit score will improve. Just avoid predatory credit cards in the future to keep your credit score healthy.

Cons of Debt Consolidation Loans

They Won’t Solve All Your Problems

Realistically, debt consolidation does help you reduce the number of payments you’re making. It can also reduce your monthly payment and cut down on interest. But it won’t solve your debt problem — you’ll still need to pay what you owe. 

There Are Fees

When you take out a loan, there are origination fees. Those can add up. If you have small debts you could wipe out quickly without a fee, taking out a new loan might not make sense.

They Ding Your Credit Report

When you take out a loan, it does negatively impact your credit. While that effect is often short-lived, it can make getting credit or another loan more difficult until the score recovers.

How to Apply for a Debt Consolidation Loan With Bad Credit

The path might not be easy, but here’s how to get a debt consolidation loan with bad credit in four steps:

1. Wait for the Right Time

If your credit score is low, consider tackling a debt or two on your own before applying for a loan. Reducing your open lines of credit will decrease your credit utilization rate, improve your debt-to-income ratio, and boost your credit score, which should help you get a lower interest rate when you apply for your loan. 

2. Compare Options From Multiple Lenders

A huge pro of getting a personal loan from an online lender is the pre-qualification option. Most lenders now let borrowers pre-qualify without impacting their credit scores.

To do so, provide accurate information about your income, outstanding debts and credit history. From that information, lenders will make an educated guess about lending to you and let you know if you’ll be approved.

You can get pre-qualified with as many lenders as you would like. In their pre-approval offers, lenders will let you know the interest rates they intend to offer you, the loan amount you will be eligible for and any fees (like origination fees) you should expect to pay.

3. Improve Your Chances With a Secured Loan or Co-Borrower

While getting an unsecured personal loan by yourself is the ideal scenario, you can improve your chances for approval by applying for a secured loan or adding a co-borrower.

Secured Loans

Debt consolidation loans are typically unsecured loans without collateral, like a car or home, which makes them riskier to lenders.

Lenders do offer secured loan options for consolidating debt with bad credit, meaning you could put up your assets as collateral. Doing so will generally get you a lower interest rate and improve your chances of being approved. But beware: If you default on your loan, you could lose the asset you put up as collateral.

Co-Borrowers

Like a cosigner for a student loan or mortgage, having a co-borrower on your personal loan can improve your chances if they have a strong credit score and lower DTI ratio.

Finding a co-signer can be difficult because that person takes on equal responsibility for the debt consolidation loan. As the borrower, you are risking someone else’s finances on top of your own.

4. Apply or Find an Alternative

If you qualify for a debt consolidation loan for bad credit that makes sense for you financially, begin the application process. If you don’t receive any offers, start considering debt consolidation loan alternatives.

Alternatives to Debt Consolidations Loans for Bad Credit

A debt consolidation loan is a great solution for managing massive credit card debt, but not everyone can get approved. Here are some other ways to consolidate debt:

Balance Transfer Credit Cards

Balance transfer cards operate along the same lines as a debt consolidation loan. You open a new credit card (or use an existing one) with a lower APR to pay off all your high-interest debts.

It’s still a credit card, which comes with some inherent risks. Explore if a balance transfer card makes sense for you.

Home Equity Loan

If you are a homeowner, you have another option. Applying for a home equity loan or a home equity line of credit (HELOC) allows you to use your home as collateral to obtain funds to pay off higher-interest debt.

Because you are risking your most important asset (your home), it is important to only take out a home equity loan if you are confident you won’t miss any monthly payments.

Friends and Family

If you are drowning in debt and can’t feasibly take on a debt consolidation loan to get out, you can always ask friends and family for help. Borrowing and loaning money can be a difficult topic even for close friends and family, so approach the conversation respectfully and be ready to hear (and accept) a lot of rejections.

Debt Management Plan

A debt management plan (DMP) is an offering from an agency accredited by the nonprofit National Foundation for Credit Counseling (NFCC) or Financial Counseling Association of America (FCAA). If you participate in the program, the agency will handle your multiple monthly payments, and you’ll make a single payment.

Credit Counseling

Though some credit counselors offer limited services free of charge, most require a fee. For that fee, they will offer advice about your credit score with concrete steps you can take to improve it. As part of their services, some counselors may help you set up a DMP.

Debt Settlement

You can work with a debt settlement company, like Freedom Debt Relief or National Debt Relief, who will advocate on your behalf with creditors in an attempt to lower your overall debt.

However, you have to pay for these services (which aren’t guaranteed to work). If you are spending your money on debt settlement, you are likely not paying off your outstanding debts and risk falling further behind or defaulting.

Bankruptcy

Filing for bankruptcy comes with serious consequences and should be your absolute last resort. When you file for bankruptcy, you may lose some assets, depending on the type of bankruptcy you choose.

It will get you out of most debt, but not all debt. Most student loans are immune to bankruptcy, for example. However, bankruptcy can give you a chance at a fresh start. Having the support of family and friends, especially if you need to look for a place to live following bankruptcy, is often crucial to success.

Contributor Timothy Moore is a writer and editor in Cincinnati who focuses on banks, loans and insurance for The Penny Hoarder. His work has been featured on Debt.com, The Ladders, Glassdoor, WDW Magazine, Angi and The News Wheel.