How to Consolidate Debt with Bad Credit
Even if you can’t qualify for a debt consolidation loan, there’s another way to get most of the benefits it offers.
Debt consolidation is a relief option combines multiple debts into a single monthly payment at the lowest interest rate possible. In the right circumstances, it can help you save money and get out of debt faster. The most common way to consolidate is with a debt consolidation loan. However not everyone can qualify and, depending on your credit score, you may or may not benefit from a loan.
Thankfully, even if a debt consolidation loan isn’t the best choice for you, there are still other ways to consolidate. This guide helps you understand how to consolidate your debt when you have bad credit. If you have any questions or need help deciding if consolidation is right for you, call 1-888-294-3130 for a free, no-obligation debt evaluation from a trained credit counsellor.
Step 1: Determine if you can qualify for a debt consolidation loan
A debt consolidation loan is generally the best option to consolidate if you can qualify at the right interest rate. So, the first step you should take is to see if you qualify. You do this by shopping around for a lender or financial institution that offers a loan that will fit your needs.
Just like you should with any other loan, make sure to check with a few lenders. This will help ensure that you get the right interest rate and term to fit your budget and goals.
Tip: Shopping online makes comparing loans easier
You can use online loan comparison websites to compare multiple loan offers at once. Simply enter some basic information, such as:
- what type of loan you’re looking for – “consolidation”
- your credit score
- where you live.
The comparison tool will show you a range of loans that you may qualify for and let those lenders know that you’re interested in learning more. This can save you time and help you find lenders willing to work with consumers who have less-than-perfect credit history.
If you can’t find a lender that will give you a loan, skip to Step 3.
Step 2: Compare costs to ensure a consolidation loan is beneficial
Just because you can get a loan, it doesn’t necessarily mean that it’s the right option to get out of debt. In order to be beneficial, it should:
- Be for an amount large enough to pay off all your existing debts
- Reduce the total interest charges you pay to get out of debt
- Offer a monthly payment that works for your budget
If you have unsecured debts of more than $50,000 and you only qualify for a $20,000 loan, then this option won’t work for you. If you qualify for the amount you need, but the interest rate is as high as your credit card interest rates, then it won’t save you any money – either in total or each month.
Tools like loan and credit card calculators can help you do this. You can use the loan calculator below to see the monthly payments and total interest charges that you’d pay with a consolidation loan. Then you can use the credit card calculator to compare that amount to what you’d pay to get out of debt without the loan.
Step 3: If a loan won’t work, contact a consumer credit counselling agency
If you can’t find a lender that will approve you or the loan that they offer isn’t beneficial, then calling a credit counsellor is the next step. Consumer credit counselling agencies provide debt management programs, which are basically a professionally assisted form of debt consolidation.
A debt management program still provides the benefit of one monthly payment to pay off credit card debt and other unsecured debts. It also helps you minimize the interest charges applied to your balances.
However, instead of taking on a new debt to pay off your existing debts, the credit counselling agency helps you set up a repayment plan with your creditors. A credit counsellor will help you find a monthly payment you can afford, then they work with your creditors to reduce or eliminate interest charges.
Why debt management can work when a consolidation loan doesn’t
You can qualify for a debt management program even with a poor credit score. As long as you have enough income to make the monthly payment, you can qualify. The credit counselling team will help you work out a budget to ensure you can afford the payments.
You can also qualify regardless of how much debt you have. Many lenders have maximum amounts they’re willing to let consumers borrow with personal loans. Even if you owe over $100,000, you can use a debt management plan to pay off your debt.
Step 4: If you still don’t qualify, consider other options
If you can’t find a debt payment that will work for your budget through a credit counselling agency, then consolidation may not be the right option for you. You will need to explore other options to get out of debt, such as:
- Debt settlement
- Consumer proposals
These options allow you to get out of debt by paying back a percentage of what you owe. As a result, the monthly and total costs may be lower than what you can achieve with debt consolidation.
However, there is still a cost to get out of debt. Debt settlement programs and consumer proposals both require you to make monthly payments. Consumer proposals also have high fees; the first $1,500 of payments go to the Trustee as an initial fee plus 20% of the future payments you make. With bankruptcy, there may also be a fee, and any assets that don’t qualify for an exemption will be liquidated to pay off your creditors.
They also have a more significant cost to your credit. It will be noted on your credit report that you paid back your debt using one of these solutions. The amount of time the penalty remains depends on which solution you use.
Paying debt back through a consumer proposal will result in a negative remark that remains for three years following discharge. Debt settlement and bankruptcy both incur a penalty that can remain for six years following discharge.