Debt Consolidation Loans for Bad Credit

Bad credit has a negative impact on your day-to-day finances as well as your ability to buy a home or car, rent an apartment, or, sometimes, qualify for a job. It can feel like an overwhelming burden to overcome, especially if you have credit card debt.

Bad credit, though, doesn’t have to be forever. A debt consolidation loan with bad credit can lead to good credit and a more solid financial foundation for you and your family.

Debt consolidation means combining unsecured debts (typically credit card bills) so that you make one payment a month. The interest rate is lower than that on credit cards, and it has a fixed term of payment, anywhere from 2-7 years. A good debt consolidation loan will be less of a hit to your monthly budget, and it will save you money.

The debt consolidation loan options for people with bad credit have increased greatly with technology. Unfortunately, you’ll pay more in interest and fees, and have fewer options, than if you had good credit.

Lenders are taking a risk by lending you money, so the worse your credit, the higher the interest rate and fees. Understanding your debt and credit will help you make the right choice. If the choices are too expensive, a debt consolidation loan may not be the right debt relief option for you.

Factors to Consider When Choosing a Loan Company

Credit card debt is a major part of most people’s bad credit. Card balances reached an all-time high of $1.14 trillion in 2024, an increase of $27 billion over the previous year. People with poor credit scores have seen bigger increases in their credit card debt than those with good credit. It becomes a never-ending debt spiral.

The number of lenders willing to offer debt consolidation to consumers with bad credit is also on the rise, made easier with digital technology that, among other things, helps lenders determine risk beyond a simple credit score and history. This gives a potential borrower more choices, but there are pitfalls that come with that.

All lenders require you to be at least 18, have a Social Security number and some form of income. If you plan on applying for online debt consolidation loans, you also need an email account and a bank account with an accredited bank or credit union.

Despite what a lender offers, your state may have laws regarding loans, particularly what the minimum amount borrowed can be, or even if online personal loans are allowed. Check your state’s laws by entering the state name and “personal loan laws” into a browser. Some lenders have state information on their website, but it can be hard to find. If you’re not approved for a loan, it may not be you, it may be your state.

Consider your financial habits in general, too. If you take out a debt consolidation loan, but continue to run up debt, it’s just going to put you in a worse spot.

Eligibility and Costs

Lenders’ eligibility requirements vary, but all consider income, employment, credit history and credit worthiness to some extent. The riskier you look, the greater effect it has on interest rate, fees, loan term (length) and amount offered. Just one more APR point can hike a monthly loan payment beyond what you can afford. Many online lenders have debt calculators that help you figure out what you’re paying now and what you would pay with a certain interest rate and loan term.

Improve Your Credit

If your credit is bad, some lenders may only offer you a secured loan, in which your home or car is used as collateral. If the only offers you get are expensive or secured loans, take six or more months to improve your credit score before applying. Don’t use your credit cards or take on more credit. Make  on-time payments. Reduce what you owe – debt-to-income ration (DTI) is a major factor with many lenders. If it’s possible to increase your income, do that as well, but improving your credit will have the biggest impact.

Rate Reduction Options

Look at more than the numbers when you review lenders. Many offer reduced rates if you have the lender directly pay off creditors, or you opt for autopay for your monthly payments. Some allow co-borrowers (someone with a higher income and better credit score than you who shares equal responsibility for the loan), which can improve your options.

LightStream

LightsStream was launched in 2013 and is part of Truist Bank. It only lends to applicants with good or excellent credit, so if you are looking for a debt consolidation loan with bad credit, it’s not for you. If you can improve your credit, though, it has lower rates and a higher maximum loan amount  than other lenders. Beware, it’s one of the few online lenders that doesn’t allow a rate check without a hard credit pull. Its rate check option only shows what a monthly payment would be for a certain amount with the lowest APR. If you’re going to apply, be sure your credit score meets the minimum and you have a five-year solid credit history.

Minimum Credit Score: 660

Minimum Income Requirement: No

Origination Fee: No

Loan Amounts: $5,000-$100,000

Option to Directly Pay Creditors: No

LightStream Debt Consolidation Pros & Cons

Pros

Low APR maximum

No origination fee

High maximum loan amount

Cons

Must have good credit or better to apply

No rate check option

Upstart

Upstart, like many online lenders, isn’t a bank, but connects borrowers with lenders. Its loan offers are based on credit history and income, but also on an artificial intelligence algorithm that determines risk. Upstart says this means borrowers who may not pass another lender’s eligibility may qualify for an Upstart loan.

Minimum Credit Score: None

Minimum Income Requirement: $12,000

Origination Fee: 0%-12%

Loan Range: $1,000-$50,000

Option to Directly Pay Creditors: Yes

Upstart Debt Consolidation Pros & Cons

Pros

Unique risk assessment more flexible than traditional eligibility requirements

Can directly pay creditors

Cons

Origination fee

No joint borrowers or co-borrowers

No autopay discount

Discover

Discover, which started in 1986 with a no-fee credit card, is an online lender that offers a range of financial services including a loan specifically for debt consolidation. It has lower rates than many online lenders, but also requires good credit. Discover requires that at least 70% of your debt consolidation loan go to creditors, which it pays directly. It doesn’t allow a co-borrower, so if your credit isn’t good, it’s not a good option.

Minimum Credit Score: 660

Minimum Income Requirement: $25,000

Origination Fee: No

Loan Range: $2,500-$40,000

Option to Directly Pay Creditors: Yes (requires 70% to creditors)

Discover Debt Consolidation Pros & Cons

Pros

Low maximum APR

No origination fee

Directly pays creditors

Cons

High credit score, income requirement

High minimum, low maximum loan amount

No co-borrowers

Lending Club

Lending Club started out in 2007 as a peer-to-peer lender but is now an online bank and financial services company. It allows co-borrowers on debt consolidation loans, and doesn’t require a minimum credit score, though it does emphasize that it considers credit score and creditworthiness as factors for approval.

Minimum credit score: None

Minimum Income Requirement: None

APR: 8.98%-35.99%

Origination Fee: 3%-8.00%

Loan Terms: 24-60 months

Loan Amounts: $1,000-$40,000

Option to Directly Pay Creditors: Yes

Lending Club Debt Consolidation Pros & Cons

Pros

Low origination fee

Option to directly pay off creditors

Allows co-borrowers

Cons

Low maximum loan amount

High rates for borrowers with bad credit

Prosper

Prosper started in 2005 as the first online peer-to-peer lender, which means debt consolidation loans are funded by investors. Borrowers don’t get the money directly from the investor, but from WebBank, which finances the loans. Prosper rates applicants 1-11 based on their income, DTI, and creditworthiness (a number only investors see). If the loan can’t get 70% funding from investors, it won’t be approved.

Minimum Credit Score: 600

Minimum Income: None

Origination Fee: 1%-9.99%

Loan Amounts: $2,000-$50,000

Option to directly pay creditors: No

Prosper Debt Consolidation Pros & Cons

Pros

Peer-to-peer lending can be easier to qualify for

Relatively low credit score requirement

No income requirement

Cons

Creditworthiness, income, and DTI play major part in approval

If investors don’t chip in 70% within 14 days, loan is canceled

Best Egg

Best Egg is an online financial services company that offers loans funded by Cross River Bank, an industrial bank that funds online lenders. Debt consolidation borrowers have the option to directly pay off up to 10 creditors. You’ll need a three-year credit history to qualify for a loan. Loan terms of more than four years are charged a minimum 4% origination fee.

Minimum credit score: 600

Minimum Income Requirement: None

Origination Fee: 0.99%– 9.99% (4% minimum for loans of 4 years or more)

Loan Amounts: $2,000-$50,000

Option to directly pay creditors: Yes

Best Egg Debt Consolidation Pros and Cons

Pros

Low minimum APR

Will directly pay off up to 10 creditors

Cons

Costly for bad-credit borrowers

Origination fee high on longer loan terms

Upgrade

Upgrade is a financial platform that provides loans through lending partners to people with less-than-good credit. Applicants must have at least a two-year credit history to qualify. Rates are lower for borrowers who choose autopay and/or to directly pay off creditors.

Minimum Credit Score: 580

Minimum Income Requirement: None

Origination Fee: 1.85%-9.99%

Loan Amounts: $1,000-$50,000

Option to directly pay off creditors: Yes (comes with rate reduction)

Upgrade Debt Consolidation Pros & Cons

Pros

Low minimum credit score

No income requirement

Rate discount for autopay, direct creditor pay

Cons

Two-year credit history requirement

Origination fee

For best rate must choose autopay, direct creditor payoff

Achieve

Achieve, formerly FreedomPlus, is a digital finance company that has been offering debt consolidation loans and other financial services since 2008. It has a higher credit score requirement than some other online lenders, but it also allows a co-borrower. Achieve gives a rate discount of up to 4.5% to borrowers who use at least 85% of the loan to directly pay off debt, and up to 4% off for borrowers who show proof of retirement savings.

Minimum credit score: 620

Minimum income Requirement: None

Origination Fee: 1.99%-6.99%

Loan Amounts: $5,000-$50,000

Option to directly pay creditors: Yes (4.5% rate reduction if 85% goes to creditors)

Achieve Debt Consolidation Loan Pros & Cons

Pros

Low maximum origination fee

Low minimum APR

Highrate reduction options

Allows co-borrowers

Cons

High loan amount minimum

High minimum credit score

Lowest rates for borrowers who can take advantage of rate reduction options

Avant

Avant is an online lender founded in 2012 with the goal of providing credit to middle-income customers. Its loans are funded through WebBank, an industrial bank that funds many online lenders. Its administration fee, basically an origination fee, differs from others in that if a fee higher than 5% is charged, it’s refundable on a prorated basis if the loan is paid off early. Avant’s $25 late payment fee, due after a 10-day grace period, is higher than many others.

Minimum credit score: None (most borrowers are between 600-700)

Minimum Income Requirement: None

Origination Fee: up to 9.99% administration fee

Loan Amounts: $2,000-$35,000

Option to Directly Pay Creditors: No

Avant Debt Consolidation Pros & Cons

Pros

Portion of administration fee may be refunded upon early payoff

Flexible on credit score, income

Cons

Low maximum loan amount

Higher minimum APR that competitors

High late fee

How to Apply for a Debt Consolidation Loan with Bad Credit

The steps to apply for a debt consolidation loan with bad credit start long before you click on that online application, or before you walk into the bank or credit union, if you’re applying in person. Either way, you’ll need to do some homework.

There is information to gather and review, so you’ll know how much to request and whether the offers you see are worthwhile. Checking your rate with most online lenders won’t affect your credit, but once you apply, there will be a “hard pull” on your credit. Too many hard pulls lower your credit score, so be armed with knowledge before you move from checking rates to applying.

If your credit score is less than 660, you may want to take six months to improve it before you apply. This will get you better deals.

If you have a relationship with a local bank or credit union, you may want to talk to someone there about what you qualify for before looking at online options. It takes longer than the minutes it takes to apply online, but you also will get a more in-depth look at your finances. The preliminary steps to apply, though, are still the same as with an online loan.

The steps to apply for a debt consolidation loan with bad credit:

1. Go over your debts and figure out exactly how much you owe, what you pay monthly and overall, how much you need to borrow and what monthly payment you can afford.
2. Gather documents that show your annual income (check stubs or tax forms). You may not need to supply documents, but you will have to give an accurate annual income number. If you are self-employed, you have to have filed as self-employed for at least two tax years to qualify for a loan.
3. If your credit is bad and your income isn’t that great either, line up a co-borrower. The co-borrower has to be willing to take equal responsibility for the loan, as well as have good credit and a good income.
4. You won’t be asked your credit score when you apply, but knowing it will have an impact on which lender or lenders you apply to. Visit annualcreditreport.com, to get credit reports and credit scores from the three credit reporting agencies. They’re free and good to check even if you’re not applying for a loan. Check your credit report for errors and follow the information for correcting them, if there are any.
5. You can check rates with most online lenders without influencing your credit score using their “check your rate” button. They’ll ask how much you want to borrow, your income, what the loan is for, and some identifying questions. Do this with several lenders. You may be surprised at the difference in APR, terms, and amounts they’ll offer. Some may offer less than what you’ve requested, depending on your income and credit score.
6. When you find an offer that meets your criteria, click on the offer acceptance. You will be asked to fill in personal information that includes your name, Social Security number, income, provide a bank account number and the bank’s routing number, and an email address. The lender will pull your credit report.
7. You may be approved within minutes. In some cases, the lender may ask you to supply documents to back up your income or other financial information.

Tips for Choosing the Right Debt Consolidation Loan

The bottom line for getting a debt consolidation loan is that you want to save money. In the short term, your debt payment should cost you less every month. In the long run, you don’t want to have never-ending revolving credit that costs you multiple times what you paid for your original purchases. Take a look at your credit card statement to see what you’ll pay if you only make minimum payments and how long it will take to pay off. It will be an eye-opener.

Choosing the right loan depends largely on the offers that are made to you and how much the loan will cost.

Things to consider when choosing a debt consolidation loan:

Interest rate. The lower your credit score, the higher the interest rate on the loan. Interest rate has an impact on your monthly payment as well as the overall cost of the loan.

Origination fee. Most lenders charge an origination fee that’s a percentage of the loan amount. It’s based on your credit score, income, length of the loan, and other factors, depending on the lender. This fee is sometimes tacked on to the amount you’re borrowing, so a $10,000 loan may actually be an $11,000 loan. With other lenders, it’s subtracted, so a $10,000 loan may end up being $9,000 into your bank account.

Late fees. Many lenders offer a small rate reduction if you sign up for automatic payments. That can save money in other ways, too. It means the loan will be paid on time, and you can avoid late fees, which also will add to your monthly cost. Most lenders charge late fees ranging from $10-$39.

Term of loan. The longer the loan term, the more you pay in  interest, even if your monthly payment is lower than a shorter-term loan payment.

Eligibility requirements: All debt consolidation loans require that you are a U.S. citizen or permanent resident living in the U.S., are at least 18, have a valid email address and Social Security number, are employed or have a consistent income source, and have a personal account at a U.S. financial institution with a routing number.

Credit requirements. Credit requirements vary, but some universal ones are no bankruptcy for the previous 12 months and no current delinquent loans. Most also have a limit on “hard pulls” to your credit in the past year. Checking rates is usually a soft pull, applying for a loan, credit card or other financing means a hard pull.

Direct payment to creditors. If you’re serious about borrowing the money to pay off your debt, take advantage of a lender’s offer to directly pay creditors. Check to see if they offer a rate discount if you choose this option. Some require 50% or more of your loan sent directly to creditors for you to get the rate discount. Some require it for you to get the loan.

Early payment fee. There is almost no lender that charges a fee if you pay the loan off early. If the lender you’re considering does, find one that doesn’t.

Read the fine print. Be sure you closely read and understand the documentation the lender sends you before you sign it so there are no costly surprises.

Ways to Get a Debt Consolidation Loan with Bad Credit

Straighten out your credit report (there could be errors) and know your credit score before you apply for a debt consolidation loan. Improving both is key before you start researching lenders.

Tips to make yourself more eligible for a debt consolidation loan:

• Improve your credit score by paying your bills on time.
• Keep your credit card balances at 30% or less of their limit.
• Don’t sign up for new credit cards.
• Work on your debt-to-income ratio. This is an important number to lenders. Pay off any debt you can before applying for the loan.
• Look for debt consolidation loans where lenders consider factors other than credit scores, including job history, income, and education.
• Have a family member or friend co-sign the loan. Keep in mind, they’re on the hook if you can’t make payments.

Debt Consolidation Alternatives

If bad credit disqualifies you from getting a loan, there are debt consolidation alternatives that can improve your standing. These options vary dramatically in cost and effectiveness, so research them thoroughly before choosing one.

• Debt management programs consolidate credit card debt, reduce your interest rate, and arrive at an affordable monthly payment. It’s not a loan, but you can eliminate debt in 3-5 years.
• Homeowners can tap into the equity in their house with a home equity loan or line of credit (HELOC) that can be used to pay off consolidated debts. You are putting your home at risk of foreclosure if you can’t make payments, and the mortgage interest is only deductible if you use it for home improvements, not if it’s for debt consolidation.
• Debt settlement – Asking creditors to forgive a large portion of debt in return for a lump-sum payment sounds attractive, but there are many factors involved that make this a risky, sometimes costly alternative. Some nonprofit credit counseling agencies also offer nonprofit debt settlement, or credit card forgiveness, but its availability is limited.
• It’s possible to borrow from your 401k retirement account, but if you are younger than 59 and a half, there is a 10% penalty and you are taxed on the amount withdrawn. This is not considered a good option.
• Contact a nonprofit credit counseling agency for free advice on each of the alternatives mentioned in this section. If nothing else, they can spell out the pros and cons of each option, which should help you make a more educated decision.

Managing a Debt Consolidation Loan

If you consolidate your debts with a loan or some other form of debt relief program, you have taken a step in the right direction, but improving your credit score and eliminating debt is typically a 3-5 year journey.

You’ve already taken the most important one – addressing the debt – but there are a few more things you can do to improve the chances of success:

• Make a budget. The easiest way to improve your financial situation is to create an honest, affordable budget. Look at it every month to see if there isn’t one more expense you can cut, or one more source of income you can add.
• Pay on time. Pay at least the minimum on every credit card and the maximum your budget will allow. That alone will improve your credit score.
• If you can put your credit cards away for a month, that’s great. If you stretch that to six months, your results will be fabulous.
• Track your progress. If you have a bank loan or are in a debt relief program, you have an online account where you can track your progress. Check it frequently to see how well you’re doing. It’s a great motivator.

Taking Control of Your Debt

Debt can be overwhelming, and when you combine it with bad credit, it may seem like an unsolvable problem. But you can do something. It’s your money, and you are in control.

A debt consolidation loan can help you manage debt as well as improve your credit. Understanding your debt, your credit status, the factors involved in a debt consolidation loan with bad credit, as well as reviewing your debt, are the foundation for choosing debt relief that will put you on the path to financial stability.

Carefully reviewing lenders and choosing one that best fits your needs is hard work, but it’s worthwhile. What could be more important to you and your family?

If you need help to figure it all out, there is plenty available. If you have a relationship with a bank or credit union, someone there will be happy to go over your financial situation and what you need to do to improve it if you want to take out a loan. You could also consult a counselor at a nonprofit credit agency, who’ll take a big-picture look at your debt and review all your debt relieve options with you, including debt consolidation, debt management plans and debt settlement.