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How and Where to Get Debt Consolidation Loans for Bad Credit

If you’re struggling with debt – like the other 80% of Americans1 – you may be looking for a way to pay off your bills and get back on track financially. Debt consolidation loans for bad credit profiles are one way to get out of debt, but you may be wondering where to look if you’ve been turned down by your bank or credit union. Before you go down the wrong road, take some time to realize there are choices for you, regardless of your credit history and financial situation. In addition, the more you understand about the differences between the many debt relief options, the more likely you are to make a smart decision and get on the road to financial freedom.

You should also be aware of options for debt consolidation without a loan.

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Signs to Start Looking for a Bad Credit Debt Consolidation Loan

What to Do Before Getting a Debt Consolidation Loan

How to Get a Debt Consolidation Loan

Where to Get The Best Debt Consolidation Loans with Bad Credit

Alternatives to Debt Consolidation Loans for Bad Credit

Signs to Start Looking for a Bad Credit Debt Consolidation Loan

You're Falling Behind on Your Bills

This is a big one. If you fall behind on your bills, your credit can take a big hit, and that means it’ll make it a lot more difficult to qualify for a loan if you need it down the road. Plus, a lousy credit score can mean you’ll pay more in car insurance, and it could even have an impact on your ability to get a job or find an apartment.

You're Using Credit Cards to Pay Your Bills

If you find yourself reaching for your cards whenever a bill comes due, that's a really big sign it's time to look into a consolidation loan. Using your cards to pay your bills means you're digging yourself a big hole that can be really hard to climb out of. Not only will you have an even bigger balance to pay off, but when bills come due next month, your minimum card payments will be substantially higher - and that means it'll be even more difficult to pay them on time.

You're Having Trouble Making Minimum Payments

Minimum payments are just what they sound like: The minimum amount you must pay each month in order to avoid really costly penalties. Late fees aren’t the only thing you need to worry about if you miss your minimum monthly payment. Some lenders may increase your interest rate, making it even more difficult to pay down those debts.

You're Only Able to Make Minimum Payments

Paying your monthly minimums is important. But if that's all you can afford, it could be a long time before you see your debt decrease - and you could wind up paying a huge amount in interest. For instance, if you have credit card debt of $20,000 at 18 percent interest with a minimum monthly payment of $350, it would take you nearly 12 years to pay it off - and you’d wind up paying an additional $25,807 in interest in addition to your original $20,000 balance.

You're Using Your Cards for Regular Cash Advances

If you’ve reached the point where you’re using your loans to provide you with cash or to cover your everyday expenses because you just don’t have enough in the bank, that’s a really good time to consider a consolidation loan. First, using your cards in this manner is a clear indication that you have a serious cash flow problem - one that can’t be solved with another cash advance or (worse) a payday loan. And second, those cash advances come with really high interest rates, which means it’s going to be even more difficult to make those monthly payments and stay on top of your debt.

What to Do Before Getting a Debt Consolidation Loan

Choosing to get a debt consolidation loan is a decision that needs to be properly researched to ensure the loan provides the debt help you need instead of driving you further into debt. Before getting a debt consolidation loan take some time to:

Monitor Your Credit Score

When considering a debt consolidation loan, people with bad credit may first want to take a look at their current financial situation and work on improving their credit score.

As a consumer, you’re entitled to a free copy of your credit report once a year from each of the three credit bureaus. Take the time to review it and look for any errors; contact the credit bureaus (Equifax, Experian or TransUnion) if you see anything that you don’t recognize. You should also be sure to:

  • Make your payments on time, every time.
  • Pay down some of your debt – start with a small unpaid balance that won’t seem overwhelming to pay off.
  • Resist the urge to open new accounts; not only will it make bad credit worse, but it could put you even deeper into debt.

Research Debt Consolidation Companies

Research debt consolidation companies, which tend to cater to consumers with less-than-perfect credit. But beware of the numerous scams and fraudulent companies out there; they could put you in a worse financial situation than you’re already in. Take the proper steps to ensure you work with a legitimate, trustworthy debt consolidation company. Before you get started, learn more about what to look for in a debt consolidation company.

Learn More About Debt Consolidation Loans for People With Bad Credit

You may have heard the term "risk-based pricing" in regards to debt consolidation loans for people with bad credit. So what does it mean? Lenders look at your total financial picture when determining the loan amount and the interest rate you’ll pay on a debt consolidation loan. The better your credit, the more you’re able to borrow at a lower interest rate. On the other hand, bad credit will limit the amount you can borrow, and you’ll pay back the loan at a higher interest rate than someone with stellar credit.

How to Get a Debt Consolidation Loan

Like other types of loans, debt consolidation loans have a process you need to follow in order to be considered and approved. Here's what you'll need to do:

  • First, know what you owe. This part may seem pretty obvious, but you might be surprised how many people don’t have the “full picture” of their debt. In fact, plenty of people hide bills and collection letters under stacks of mail, just to avoid facing the truth. Having a list of all your debts and creditors ensures the loan you apply for will cover all your outstanding debts.
  • Fill out the application. You’ll be asked for personal information, like your name and social security number, as well as information about your income and debts. Most companies provide an initial pre-approval so you can decide if you want to move forward with a loan. The preapproval involves a “soft pull” on your credit to confirm your information without “dinging” your credit report.
  • Review the loan terms. Before signing on the dotted line, make sure you understand the loan terms - not just the interest rate, but also the repayment schedule and terms, as well as any fees or penalties you might incur. Remember: While your interest rate is certainly an important part of your loan, the terms can play just as big a role in helping you get your finances back on track.
  • Sign and collect your loan funds. Once your loan is approved, the lender will release the funds you need to pay back your debts. Just be sure to use the funds for that purpose - and be careful you don’t start accumulating additional debt once your cards and loans are paid off.

One very important point to note here is that, if you have bad credit, there’s a very good chance you won’t meet the debt consolidation loan requirements for most lenders. Your credit score provides lenders with a quick “snapshot” of your “loan worthiness” - and that tells a lender how likely you are to pay back your loan and to pay it back on time. If you have large outstanding debts or if you’ve fallen behind in your payments - even if you’re current right now - your score is probably suffering, and that means you may not qualify for a debt consolidation loan.

Where to Get The Best Debt Consolidation Loans with Bad Credit

While you should always be working to improve your credit, sometimes you just don’t have time. The good news is, even those with poor credit have options when it comes to finding a debt consolidation loan. With bad credit, however, could come higher interest rates that could push you deeper into debt. Before jumping into the first option you find, read below to found out who offeres the best debt consolidation loans for bad credit.

Do Banks and Credit Unions Provide Bad Credit Debt Consolidation Loans?

Many people looking for debt consolidation loans with bad credit profiles contact their bank or credit union first. And while it makes sense to do business with an institution that you already know and trust, you may be disappointed if you get turned down for a loan. Banks and credit unions offer a variety of traditional loans and other products, but they typically don’t offer debt consolidation loans for people with bad credit.

Banks and credit unions often use a risk-based pricing model, meaning the bigger the risk they think you are in terms of repaying the loan, the higher the interest rate they’ll charge you. So even if you get approved for a loan, you could end up paying more in interest and fees than someone with better credit.

So whether you are approved for a loan at a high interest rate, or you get turned down because of your credit, remember there are plenty of other options for debt consolidation loans for bad credit. Just keep doing your research and contact other lenders and debt relief companies before signing any paperwork.

Can “Payday” Lenders Give Me A Debt Consolidation Loan With Bad Credit?

It may sound tempting – get a cash advance on your paycheck, and pay back the money in a week or two. But read the fine print, and you’ll find that payday lenders prey on those who are looking for debt consolidation loans for people with bad credit who need cash right away. You may be surprised to learn that 80% of payday loans are followed by another loan just 14 days later2. Often these consumers feel they have no other option, as either they’ve been turned down by their bank or credit union, or they don’t have time to wait days for an approval. Consumers who opt for payday loans are seduced by the ads promising quick cash with no credit checks.

So what exactly is a payday loan? It’s typically a short-term loan or cash advance intended to tide you over until your next paycheck. And what isn’t it? It’s not a way to get out of debt, stay debt-free, or develop strong money management skills to last a lifetime. In fact, monthly borrowers are disproportionately likely to stay in debt for 11 months or longer2. Opting for payday loans often leave consumers deeper in debt and somewhat “addicted” to the cycle of getting fast cash whenever they need it. If you’re looking for debt consolidation loans for people with bad credit, you’d be smart to look elsewhere.

Do Debt Consolidation Lenders Offer Bad Credit Consolidation Loans?

Lenders operate differently from banks and credit unions; they focus on offering debt consolidation loans for people with bad credit, as well as those with average or better credit profiles. When you opt for a debt consolidation loan from this type of lender, you’re entering into an agreement for the lender to pay off your existing debts now. You’ll then have one loan – meaning just one monthly payment – due to the lender, which you’ll pay back over a period of time. Debt consolidation loans typically use a risk-based pricing model similar to banks and credit unions, so the interest rate you pay is based on your credit and ability to pay back the loan.

A reputable lender will offer several different debt consolidation loans for bad credit profiles. They understand a one-size-fits-all approach doesn’t take into account your unique financial situation. If you decide to work with a debt consolidation lender, make sure they show you multiple options, and that you understand how each works, how much you’ll pay every month, your interest rate and any fees, and how quickly you can pay off the loan.

Low-Interest Credit Cards

This is often the first option consumers consider when it comes to debt consolidation: Get a low-interest card and use it to pay off existing debts. But the fact is, to get a low-interest card, you need to have really great credit. And if you’re already in a significant amount of debt, chances are you’ve missed some payments and had some penalties. Plus, most cards won’t give you a credit line big enough to pay back all your debts, which means you’ll still have multiple creditors to deal with. Bottom Line: For debt consolidation with a bad credit history, credit cards are rarely a good option.

Home Equity Loan or Home Equity Line of Credit (HELOC)

If you own a home, it may seem like a good idea to tap into that equity to pay off high-interest debts. But like other consolidation loans for bad credit, home equity loans only make sense for people with top-tier credit scores who qualify for the absolute best terms. And as with credit cards, you need to be sure you don’t rack up more debt once you pay your cards off with your home loan.

Peer to Peer Lending

Peer to peer lending allows regular people to organize loans between one another, usually through a website. This means bypassing the traditional banking loan system, as such, it may be easier to get a loan from a P2P website than from a bank. However, your credit score and profile still play an important role in determining interest rates.

Alternatives to Debt Consolidation Loans for Bad Credit

Although debt consolidation loans are an option when you have bad credit, they might not be the best option. There are a few viable alternatives to debt consolidation loans for bad credit you should be aware of that may be a better fit, and could help you get out of debt faster.

Consumer Counseling Agencies

Nonprofit consumer credit counseling agencies offer alternatives to debt consolidation loans for people with bad credit. They may help you negotiate better interest rates with your existing creditors or find another way to pay down your debts. And they may sound like the best option available – work with a nonprofit agency that’s looking out for your best interests, right?

Many people assume a consumer counseling agency is the best choice, simply because the words “not-for-profit” imply an agency is helping consumers out of the goodness of its heart. But the only difference between a non-profit and a for-profit debt relief company is that the non-profit doesn’t pay taxes on the money they make. That means they may still charge fees for their services. It’s up to you to do your research to find a company that has a strong record of success getting people out of debt the right way.

When doing your homework, don’t let the non-profit status of a consumer credit counseling agency fool you into thinking it’s the only or best option for getting out of debt. Between debt consolidation loans for bad credit profiles and the alternatives to traditional loans, you have a lot of choices to improve your financial situation.

Debt Relief Companies

Debt relief companies, such as the providers of CareOne Debt Relief Services, are another option for people with bad credit. While ultimately the choice is up to you, a debt relief company like CareOne takes into account your specific needs and individual financial situation. This solution may offer everything you need to pay off existing debts and get on the road to financial freedom.

Depending on the debt relief company, they may offer several options for getting out of debt. For example, CareOne provides two plans for consumers; while they do not provide debt consolidation loans for people with bad credit, they work in similar ways and can help you get out of debt and stay debt-free for the long-term.

  • Debt Management Plans– A Debt Management Plan (DMP), such as that offered by the providers of CareOne Debt Relief Services, is a debt consolidation plan that may help you pay down all of your debt within five years. You may enjoy a lower interest rate than you’re currently paying to your existing creditors, meaning you could save money every month.
  • Debt Settlement– With debt settlement, you make monthly payments that you can afford to your debt settlement provider for deposit into an escrow account. Meanwhile, the provider negotiates with creditors for a lower settlement on the outstanding sums you owe. Once an agreement is reached, the deposited funds are used to pay the negotiated amount to the creditors.  This option is best for people with bad credit who can’t afford their current monthly payments, and are looking to avoid bankruptcy.

Ultimately, the decision to go with a debt consolidation loan or one of the other alternatives depends on what will work best for your unique financial situation.

You can also check out CareOne’s extensive article library as a great resource to help you make smart financial decisions now and in the future.  

1 - The Motley Fool - Most Americans are Currently in Debt
2 - Consumer Financial Protection Bureau - Payday Lending Data Points

A. Landow - Author Bio


A. Landow has been in the financial industry for over 20 years and has helped CareOne to become a treasure trove of information for people struggling with debt. She enjoys helping Care One’s readers educate themselves about personal finance and debt consolidation options that can help them take control of their finances.

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