Can you get debt consolidation loans with bad credit?

Struggling with multiple high-interest debts? A debt consolidation loan might be a smart way to regain control. This type of personal loan lets you combine several debts into one manageable monthly payment—often with a lower interest rate.

If you have bad credit, you might think consolidation is out of reach—but the good news is, you can get a debt consolidation loan with bad credit. While it may take extra effort to qualify and find favorable terms, it’s possible. Below, we’ll explore how it works, what to expect, and how to boost your chances of approval.

Debt consolidation loans for bad credit

Unsecured loans

Unsecured personal loans are based on your creditworthiness and don’t require collateral. Offered by banks, credit unions, and online lenders, they usually cap out between $50,000 and $100,000. Repayment is made via monthly installments over a set term, typically 2-7 years.

The process is relatively fast; you submit an application, get approved or denied nearly immediately, and receive your funds a few days later. Borrowers generally need a good credit history to get favorable rates. Additionally, personal loans come with fees, such as origination fees, application fees, late fees, and occasionally prepayment penalties.

Reputable lenders include Avant, LendingPoint, and OneMain Financial.

Secured loans

On the other hand, secured loans are tied to an asset you use as collateral, like a house or a car. Since the lender can seize the collateral if you default on the loan, they take on less risk. Therefore, getting approved for a secured loan can be easier if you have bad credit.

Secured loan options include:

Bad credit loan

Some lenders offer bad credit loans geared explicitly toward borrowers with bad credit. Often, these loans require collateral, like a secured credit card or cash. As with all types of secured loans, if you fail to make your loan payments as you agreed to, the lender has the right to take the collateral.

401(k) loan

A 401(k) loan allows you to borrow money from your own retirement savings, typically up to 50% of your vested account balance or $50,000—whichever is less. You repay the loan, plus interest, through automatic payroll deductions, usually over a term of up to five years.

Because the 401(k) leverages your nest egg as collateral, credit is not a factor for eligibility. So, as long as you have an eligible plan and enough to cover your balances, a 401(k) loan can be a guaranteed debt consolidation loan for bad credit.

However, if you leave your job before the loan is fully repaid, the outstanding balance may be treated as a distribution and subject to income tax and possibly a 10% early withdrawal penalty if you're under age 59½. It's also important to note that failing to make catch-up contributions can result in a serious retirement shortfall. Consider talking to a financial advisor before moving forward.

Home equity loan or home equity line of credit

A home equity loan allows you to borrow against your equity for a lump sum of cash. You’ll begin monthly repayment almost immediately over a term that is typically between 5 and 20 years. Interest rates are fixed and are more competitive than credit cards and personal loans, making for set monthly balances.

With a home equity line of credit (HELOC), you get approved for a certain loan amount but can access the cash as a revolving line of credit. The draw period lasts up to 10 years, and then you're on the hook for repayment, typically 20 years. HELOC rates are also competitive but variable, so your monthly payments can fluctuate during repayment.

Home Equity Investment (HEI)

Although not a traditional loan, a home equity investment is another way to tap into your home’s equity for cash. Unlike a home equity loan or HELOC, there are no monthly payments over the 30-year term. Instead, homeowners share a percentage of their home’s future appreciation when they decide to exit the partnership at any time during the term.

HEIs have less stringent requirements: a credit score above 500, no income requirements, and a DTI ratio determined by your credit score.  

When does it make sense to consolidate your debt?

Debt consolidation isn’t for everyone. However, it can be a good idea if you can:

• Simplify repayment: Combine multiple debts into one monthly payment to reduce stress and stay organized.
• Lower your interest rate: A consolidation loan with a lower rate can cut interest costs and help you pay off debt faster.
• Ensure it saves you money: Use a debt consolidation calculator to confirm that savings outweigh loan fees and costs.
• Commit to staying debt-free: Avoid racking up new debt by adjusting spending habits and sticking to your repayment plan.

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Improve your credit—improve your options

As you work toward paying off existing debt, you'll undoubtedly see improvement in your credit score. This will make you eligible for more options and better rates as you navigate your journey to financial freedom. While it can take time and effort to see improvement, it will be worth it when you reach your financial goals. So, before rushing into a debt consolidation loan with bad credit, carefully approach your debt payoff journey with a mixture of DIY solutions and debt relief options.