Best Debt Consolidation Options for Poor Credit

The following article is presented for informational purposes only and is not intended as credit repair.

If you’re struggling with debt, you may have considered debt consolidation. Debt consolidation lumps all your high-interest debt, such as outstanding credit card balances, personal loans and medical bills, into one lower-interest monthly payment.

In turn, it could reduce the total amount owed. Plus, by making a single payment instead of a bunch of different creditors, it simplifies the repayment process, saving you a lot of headache. Some of the common ways to consolidate your debt is to transfer your debt to a 0 percent APR credit card or by taking out a debt consolidation loan.

Here’s the thing: To qualify for these debt consolidation methods, you typically need a solid credit score. Otherwise you may get outright denied or pegged with a high-interest loan. (Not exactly an ideal situation when you’re already swimming in mounting debt.)

If you have less-than-stellar credit, you may feel out of luck.

But that’s not the case. You don’t have to feel like your back is against the wall. You do have options. 

There are several ways to go about consolidating your debt if you have poor credit:

Debt Consolidation Loan

The classic debt consolidation loan involves you taking out a loan in the amount of your debt, using the funds to pay off your loans, then repaying your new lender over time. The value is in the simplification - you have one creditor and make one payment per month. Ideally, the terms of the consolidation loan should be more favorable than the terms of the original debts. You could get an unsecured loan or a home equity loan if you're a homeowner.

How to get a debt consolidation loan

Consolidation loans are typically available through banks, credit unions, and other financial institutions. Getting a debt consolidation loan is a matter of shopping around for loan offers, working with the lender to submit an application, and then following through on the terms if you're approved.

It's always a good idea to start your search with your current bank or credit union. Just keep in mind that this might not always be your best option. Prior to beginning the application process, you may want to do the following:

• Avoid missed payments. Missed payments can ding your credit and make you a less appealing candidate for a loan.
• Pay off smaller debts. If you're able to clear off any smaller debts before seeking a consolidation loan, it may help boost your credit score and improve your chances of being approved.
• Avoid adding new debts. Don't fall into the trap of thinking you can create some "last minute" debt before consolidating everything into a new loan. That behavior may not look good to lenders when considering your application.

Every lender is different, so even with poor credit you may qualify for some loan programs. However, while approval isn't out of the question the odds aren't in your favor. And if you do qualify for a loan, the trade off may be that your interest rate is on the high side, which can make your new loan costly. 

There are other downsides, too. Typically the credit cards you are struggling to pay off stay open. So you could possibly continue to rack up debt while trying to paying it off. That may make things easier in the short term, but doesn't represent a real, lasting solution.  

Nonprofit Debt Repayment Plan

If you're concerned about your ability to be approved for a consolidation loan, you're in luck. You can consolidate your debt without a loan by using a debt management plan (DMP).

“If you have poor credit, you might be better off sticking with the loans you have, and exploring a debt repayment program,” says Stephen Newland, a financial coach and owner of Find Your Money Path.

There are a handful of nonprofit credit counseling agencies that help you consolidate your debt into a single monthly payment without having to take out a loan. Working with a nonprofit counselor, you'll create a repayment plan that usually includes substantial interest rate reductions from your creditors. You make one payment to the plan manager, who then makes payments on your behalf to all of your creditors. DMPs are typically designed to have you out of debt within three to five years.

Keep in mind that unlike a debt consolidation loan, with a debt management plan your credit card accounts are almost always closed. In exchange for all the perks that help you crush your debt, the credit card companies don’t want you to accrue any new debt, so they will often close your account after they’ve agreed to the terms of your new debt management plan.

These programs usually have lower fees than if you consolidated via a loan through a bank. Plus, if you start a DMP through a nonprofit credit counseling agency, you’ll also receive debt counseling and access to additional financial education, which can help prevent your issues with debt from reoccurring.  

Tips for successfully consolidating your debts with poor credit

While trying to figure out the best option for debt consolidation for poor credit, here are a handful of tips:

Start by having a conversation with someone

If you are thinking of debt consolidation by loan, It’s a lot harder for you to get considered when the lender merely sees you as a bunch of numbers run through an online algorithm, says Newland. “If you go to a local community bank or credit union, they still use formulas and algorithms, but bankers also have the flexibility to consider your unique situation.”

If you’ve decided that a debt repayment plan is the best choice for you, make an appointment to see a certified credit counselor. They can assess your situation and help you come up with a strategy and course of action that will help you save money and pay off your debt in a timely manner. Most important, they will treat you like a human, and figure out a game plan based on your needs and circumstances.

Carefully weigh the pros and cons

The major draw of debt consolidation is that it’s simpler and you only have to make one monthly payment. If you aren’t saving a lot on the interest, debt consolidation may not be the best option for you. One of the downsides is that you’ll lose flexibility.

“Sometimes people get really motivated when they can knock out a small debt quickly,” says Newland. “ If you consolidate, as you’ll be combining small debts into one larger debt, psychologically it may feel like a bigger mountain to climb.”

“Also, the benefit of keeping smaller debts is that if you pay each of them off, you then have the option of what to do with that monthly payment moving forward,” says Newland. “With a consolidated loan, you’re locked in.”

Carefully review the terms and conditions

Just because a monthly payment goes down compared to what you’re paying now doesn’t mean it’s a better deal for you, points out Newland. “It might help you manage your monthly bills, but if the term of the loan is longer than your original loan, you’ll pay more in interest if your percentage rate on the loan is the same,” says Newland. “Also, double and triple check the paperwork with the lender to see what fees they are charging.”

Exhaust other options first

Before you resort to taking out a loan to consolidate your debt, work on cutting expenses or finding extra work so you can stay on top of your debt payments, suggests Newland. Remember: debt consolidation can actually cost you more, especially if you have poor credit, since you’ll be subject to higher interest rates and fees, and may not get the best terms.

Create a budget and cut expenses

Before pursuing debt consolidation, make sure that you're truly making the most of your money. You may need to create an especially lean budget for a few months or even longer, but simply making budget cuts and directing more money toward debt repayment may be a better solution. 

Find extra work to help pay off debts

While taking on a part-time job isn't an appealing option for most people, it may be that the fastest way to get out of debt is to create more income. If you have a tight budget, it may not be possibly to spend any less than you already do. Picking up a temporary side hustle, however, may help create the extra cash you need to get out of debt quickly.

Borrow money from friends or family

Borrowing money from friends and family can be a thorny issue and depending on your interpersonal dynamics, it may not be a good option for you. That said, if you set the terms, maintain communication, and follow through on your promises, borrowing money with low-to-no interest can be an extremely helpful tool if you're struggling with debt.

Maintain best practices

“Sometimes consolidating debt can feel like we’re taking positive steps, but in reality we’re just moving things around,” says Newland. “The best way to get rid of debt is to attack it with extra principal payments steadily and consistently. This will by far be the best way to get rid of debt.” And of course, don’t add any more debt to your existing burden. If necessary, freeze your cards, unlink them from online accounts, and stash them away.

Interested in seeing how much you can save with a nonprofit debt management plan? Begin your free financial analysis online and get a DMP estimate with a projected monthly payment and total savings.