Four Debt Consolidation Loan Options for Bad Credit

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Finding debt solutions when you have bad credit is tough. Borrowing money, even to consolidate debt, usually requires that you have a good credit score. Debt consolidation loan options for bad credit do exist, but the pricing and terms may not be as attractive compared to those available for borrowers with good credit. Spend some time shopping around to find the best terms you can qualify for. Avoid choosing a bad loan out of desperation––it could end up costing you more in the long run.

Compare Debt Consolidation Loans

Being able to look at multiple loans side-by-side can give you an idea of how the terms stack against each other. Use a service like to search for lenders who offer loans to consumers with your credit score. A loan comparison service puts the options right in front of you, making it easier to choose.

Be prepared for options with higher interest rates. APRs on debt consolidation loans for bad credit can be as high as 36 percent in some cases, which makes consolidating your debt expensive. You can expect loan terms to range from 24 to 60 months. The longer your repayment period, the lower your payments will be, but the more interest you’ll pay.

For example, a $10,000 loan at 35.99 percent APR repaid over 5 years would have a monthly payment of $361.27. You’d pay more than double that amount in interest––$11,676 to be exact. If your credit score only allows you to qualify for high-interest-rate loans, it's best to consider other options.

Use Peer-to-Peer Lending

Peer-to-peer lending uses crowdfunding to allow you to borrow money from individual investors. These investors personally review your profile and application and decide whether to lend to you. Your loan request may be fulfilled by multiple investors, but you’ll still only have to make a single payment each month .,, and Upstart are a few peer-to-peer lending platforms you can consider to access a debt consolidation loan with bad credit. Like other loan comparison sites, peer-to-peer lending networks present you with multiple options to compare and choose from. Some even let you check your rates without doing a hard pull on your credit.

Transfer Balances to a New Credit Card

Taking advantage of a promotional balance transfer offer is a great way to pay off high-interest rate credit card debt. Unfortunately, it’s difficult to qualify or a zero percent balance transfer credit card when you have bad credit. You may, however, be able to transfer balances to an existing credit card if you have enough available credit. Even if you don’t get the benefit of a lower interest rate, consolidating credit card balances makes it easier to pay off your bills. The more you can combine your balances, the fewer payments you have and you can focus on paying off fewer debts.

Consolidating with a credit card can cause your credit score to drop if your credit utilization goes up. However, your credit score will typically recover as you pay off the balance.

Tap Into Your Home Equity

One of the benefits of ownership is the ability to tap into the equity you’ve gained over the years. Depending on the method and the lender, you may be able to tap into 85 percent of your home’s equity to consolidate your debt.

Home Equity Line of Credit

A home equity line of credit is a line of credit that’s secured by your home. During the initial years of your HELOC, you’re only required to make monthly interest payments on the credit line. Once this “draw” period is over, you’ll have a set amount of time to pay your outstanding balance in full. The lender will consider your debt, income, and credit when you apply for the HELOC.

Second Mortgage

A second mortgage is a new loan, separate from your primary mortgage, based on the equity you have in your home. Second mortgages carry higher interest rates than primary mortgages but lower interest rates than credit cards. This is something to consider when you’re weighing your options.

Cash-Out Refinance

With a cash-out refinance, you refinance your mortgage into a new one, taking out the equity you’ve earned as cash. You can then use the cash to pay off your debts. The benefit of a cash-out refinance is that you continue paying on just one loan rather than taking on an additional type of debt. The lender will consider your credit score, your debt, and your income when you’re applying for the cash-out refinance.

Compare the interest rates, loan terms, and monthly payment amounts to decide which option may be the best for you. You want to keep your interest rate and payments as low as possible so you don’t put additional strain on your finances.

When you consolidate your debt with your home equity, you’re putting your home on the line. If you’re unable to make payments on any of your home-based loan products, you risk foreclosure.

Beware of Debt Consolidation Scams

As you shop your options, make sure you stay aware of debt consolidation scams. Any loan that guarantees approval or asks you to pay money before you’ve applied is likely a scam. Do the proper due diligence to avoid being taken advantage of.

Article Sources

  1. Wells Fargo. "How to Get a Loan." Accessed Jan. 31, 2020.

  2. Lending Tree. "Best Personal Loan Rates." Accessed Jan. 31, 2020.

  3. Consumer Financial Protection Bureau. "Understanding Online Marketplace Lending." Page 1. Accessed Jan. 31, 2020.

  4. Federal Trade Commission Consumer Information. "Home Equity Loans and Credit Lines." Accessed Jan. 31, 2020.

  5. U.S. Bank. "Second Mortgage vs. Home Equity Loan." Accessed Jan. 31, 2020.

  6. Discover. "What is a Second Mortgage and How Is It Used?" Accessed Jan. 31, 2020.

  7. Bank of America. "Cash-out Refinance vs. Home Equity Line of Credit." Accessed Jan. 31, 2020.