Lenders use credit history to predict how likely they believe a borrower is to pay back a loan. Because payment history is the most influential factor in determining credit scores, lenders use borrowers’ past actions to guess how they’ll act in the future.
Of course, agreeing to work with a borrower with bad credit is viewed as riskier than loaning money to someone with good credit. Getting a loan with poor credit, especially as the result of inconsistent repayment of past obligations, requires more risk on the part of the lender. This means the institution may decline to loan the funds altogether, or it may raise interest rates to offset the risk if they do approve the application.
This leaves many borrowers with credit problems wondering: Is it possible to get a loan despite having a subprime credit rating? Since debt consolidation is the leading reason people take out personal loans, borrowers with credit woes and costly debt may be specifically wondering whether consolidation is a possible route to eliminating their debts.
So, is debt consolidation possible with bad credit?
As with most financial inquiries, it depends.
Consolidating Debt with Bad Credit: The Good News
The good news is bad credit doesn’t automatically disqualify you from getting a loan for the purpose of paying down your other debts. However, you’ll need to do a little more digging to find lenders that best match up with your credit profile before applying.
Investigate offerings from your bank and/or credit union as well as online lenders. Look into lenders that specialize in debt consolidation loans for bad credit, too. Some companies have loan offerings designed specifically for customers with average or poor credit — which means they’re more likely to approve these applications.
Another potential option is getting a secured loan. Debt consolidation loans are usually unsecured, which means there’s no need to back your promise to repay with collateral. Consumers with low credit scores may have better luck getting a secured loan — which entails putting up an asset like a home as collateral — because it lowers the risk level for lenders in the case of default.
Consolidating Debt with Bad Credit: The Challenges
While it is possible to consolidate debt with poor credit, it is generally more difficult than doing so with good credit. Fewer loan options will be on the table from the get-go, and it may take more effort to find a lender willing to work with you.
The other challenge associated with bad-credit debt consolidation is the steeper interest charges borrowers will encounter. According to ValuePenguin, the average annual percentage rate (APR) for consolidation loans is 18.65 percent. Consolidation APRs usually range from eight to 29 percent, but can be higher or lower depending on credit score.
Someone with poor credit can expect to pay upwards of 15 percent on average, while a borrower with excellent credit may get rates as low as 4.5 percent. As credit scores go up, average interest rates go down. It’s simply more expensive to borrow money with bad credit, which may make the point of consolidating debt moot, or at least diminish how much money you’re able to save by doing so.
Debt consolidation is sometimes possible with bad credit. As always, it depends on the exact score — and reason for that score — as well as factors like income, loan size and lending company. Shopping around is an imperative to find the lenders most likely to say yes, as well as the most competitive interest rates based on your circumstances. Anything you can do ahead of applying to optimize your credit score will also help your chances of getting a reasonable loan.