Using a personal loan to consolidate debt can help you save on interest and pay down your accounts quickly. That's because loans have lower rates than a credit card and fixed repayment terms to keep you on track.
But borrowers with credit scores below 670 could struggle to qualify for low enough rates to benefit from a debt consolidation loan. The few lenders that accept bad or fair credit charge origination fees of up to 10% and rates higher than your typical credit card.
Debt consolidation can still help you manage your debt payments and avoid rising interest rates if you have bad credit. But you may want to save this option for paying down accounts with rates over 36% APR.
To narrow down your choices, compare APR, credit score requirements and amounts available through different lenders. Select Compare for up to four lenders to weigh their benefits side by side. To check your rate, select Go to site, or More info to read an expert review.
The definition of “consolidate” means to combine things into a more effective whole. Debt consolidation involves using one big loan to pay off two or more credit card accounts or loans.
It can help you organize your debts and could save you money on interest charges if you get a lower rate on the consolidation loan than the average rate across your debts you want to pay off.
Most debt consolidation loans are unsecured personal loans. Typically, the loan provider sends the funds directly to your creditors. Then you work to pay off the personal loan that consolidated your debt.
Let’s say we have a credit card with a 27% interest rate and a $4,000 balance. In this example, our minimum payments are calculated by interest plus 1% of the balance, so our first minimum payment is $130 per month.
If we kept paying the minimum payment (without racking up more charges), we’d be paying a whopping $8,294.48 total after 268 months (22+ years) — yeesh.
Now, let’s see what happens if we consolidate with the average personal loan rate of 11.23%, reported by the Federal Reserve. We’ll choose a two-year term.
For the debt consolidation loan, our monthly payment is $186.86 and we pay a total of $4,484.61.
Overall, we save $3,809.87 in interest charges. Yes, the monthly payment is a little higher each month with the consolidation loan, but we also pay off the amount 20 years faster and save thousands of dollars.
Breakdown:
| Minimum monthly payment | Term | Total amount paid | |
|---|---|---|---|
| Keeping the credit card | $130* | 268 months | $8,294.48 |
| Debt consolidation loan | $186.86 | 24 months | $4,484.61 |
*Minimum payments decrease over time
Yes, some lenders offer debt consolidation loans for fair or bad credit. But it’s not always a good option.
Most of the time, debt consolidation loans are unsecured personal loans. With poor credit, personal loans tend to come with much higher rates and additional fees, plus they’re harder to qualify for than if you had good credit.
For poor credit debt consolidation loans, you may want to consider online lenders that use alternative factors in your application, such as work history or education. You could also look into credit unions or banks that you have current accounts with for potential discounts or more accommodations. And if none of those work, other alternatives for debt relief may be better suited for poor credit.
Yes, debt consolidation could mean saving money. Just remember that debt consolidation doesn’t reduce your total amounts owed — savings may come from reduced interest charges.
But if you have poor credit, you may struggle to qualify for a low rate when consolidating.
For fair and bad borrowers with credit scores of 580 to 619, the average APR on a personal loan was 83.61% in the last quarter of 2022, according to LendingTree’s consumer data. The much higher APR for lower credit score borrowers is likely due to qualifying for higher interest rates, short-term installment loans or payday loans.
Debt consolidation loans are personal loans, which can be a little harder to qualify for with bad credit. Many personal loan providers require credit scores in the 600s or higher.
Typical requirements include:
Legitimate lenders don’t advertise “guaranteed approval.” If you see a lender that does, take it as a red flag and look elsewhere.
A personal loan provider should fully review an application and consider your creditworthiness, income, current debts and more. In other words, a provider concerned about your ability to repay will check if you can handle the loan. A provider that promises approval regardless of your situation may mean they don’t care about your financial wellness.
Lenders vary greatly in fees and interest, so it’s important to shop around and compare offers. Here are five considerations when choosing a lender when your credit score is less-than-stellar:
If debt consolidation doesn’t yield savings or you’re simply not qualifying due to a poor credit score, consider these other options to sort out debt.
If you’re worried about interest charges and your loans don’t carry prepayment penalties, you could pay extra each month as you can to reduce interest and finish the loan early.
There are also debt payoff strategies, such as the debt avalanche method or debt snowball method. The debt avalanche method involves paying all your minimum payments but putting extra toward your debt with the highest interest rate until it’s paid off, then working down the line. The snowball method focuses on paying off your smallest balances first to keep you motivated.
This involves moving debts onto a single balance transfer credit card. However, you may need good credit to qualify.
If you can qualify for a low rate credit card with a high limit, you may be able to pay everything off with that. The best credit cards come with 0% introductory interest rates for a limited time, and if you pay off the card quickly enough, you could save a lot of money in interest charges.
Other debt relief strategies include:
If you have a home with a lot of equity, you could take out a home equity loan or home equity line of credit. Just know your home is collateral on these lending options, and you may need good credit to qualify.
It can be tough to reduce your debt while your credit score isn’t perfect. Here are some quick tips for getting out of debt and searching for consolidation options.
Visit our guide to debt consolidation to learn about more options.
Now is the time to review your finances and ensure you have a financial plan in place to get the most out of your savings and investments.
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Use this calculator to figure out how much you could save with a debt consolidation loan.
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