It may be possible to get a debt consolidation loan with bad credit. However, it’s important to realize that a lower credit score will likely mean a much higher interest rate on the loan. You must evaluate whether the interest rate you can qualify to receive will provide the benefits you need from consolidation.
Why you can’t set a number on approval
According to the credit bureau TransUnion, “Different creditors can have widely differing views on what “good” is. They can have different cutoffs for approvals and interest rates.”
This means there is no specific score that will guarantee you can get approved. Every lender has different requirements that a borrower must meet in order to qualify for a loan.
Bigger banks and online lenders may be more flexible, while smaller banks and credit unions may have higher score requirements.
Affordability must be your primary concern
TransUnion also encourages Canadians to think in terms of affordability when it comes to getting approved for any loan. They indicate that if your credit score is less than 600 or even 650 in some cases, getting approved for a loan you can afford may be a challenge.[1]
That’s not to say that you can’t find lenders who may be willing you work with you. There are lenders who specialize in working with borrowers that have poor credit.
However, be prepared that the APR they offer will likely be much higher. Higher APR means that you will pay more to borrow the money you need. Your monthly payments are likely to be higher, as well.
With this in mind, the question really isn’t whether you can find a loan to consolidate when you have bad credit. It’s whether the loan you find will provide the cost savings that you need.
Understand Your OptionsDetermining the cost-benefit of debt consolidation
There are two costs to consider as you decide whether a debt consolidation loan will be beneficial:
- Monthly cost
- Total cost
Both costs are determined by the term (number of payments) you select on the loan and the APR (annual percentage rate).
Personal loan terms range from 6 to 60 months.[2] Choosing a longer term on a loan will lower the monthly payment requirement. However, it will increase the total cost of borrowing because there is more time for interest charges to accrue.
The other determining factor is the interest rate or APR that the lender applies to the loan. A higher interest rate will increase the total cost of borrowing, as well as the monthly payments.
Since APR on an unsecured loan is determined based on your credit score, a low score is likely to increase both of these costs. You will likely face higher monthly payments as well as higher total costs.
Will the payments work for your budget?
Before you decide to get a loan, you first need to evaluate if the monthly payments will work for your budget. As you shop for a loan, lenders will provide quotes of what they would be willing to offer given your credit score. These should provide a term and an estimated interest rate.
You can use this information to determine the monthly payments you can expect on the loan. First, you should review your budget to ensure you can comfortably afford to make those payments.
You should also compare the monthly payment to the total monthly payment you must cover without consolidation. Often, people use debt consolidation loans because juggling multiple credit card bills has become difficult. In many cases, a debt consolidation loan will provide lower monthly payments.
However, if you had bad credit and face a higher APR, the monthly payment may not be lower. If you will struggle to make the consolidated payment each month, then a loan may not be the right option.
How does the APR compare to your credit cards?
One of the main goals of debt consolidation is to decrease the APR applied to your debt. This allows you to save money as you get out of debt and may also allow you to get out of debt faster.
If the APR on the loan you qualify to receive is high, then it may not be as beneficial. If you’re looking at 20% APR on the loan and have an average of 22% APR on credit cards, you’re not saving all that much.
In this case, the total cost to get out of debt is unlikely to be substantially lower. If there are minimal cost savings, then there’s less reason to consolidate. You should consider other options for debt relief that could provide more cost savings.
Where can I get a debt consolidation loan with bad credit?
Online lenders often have more flexible lending terms than traditional brick-and-mortar banks and credit unions. You can use a loan comparison tool to compare loans from a range of different online lenders and banks.
Simply enter your province, credit score, and some basic information about the loan you want. You will receive quotes for loans based on this information.
Once you receive these quotes, go through the steps we outline above. This will ensure that the loan you qualify for will provide the benefits you need.
Debt relief alternatives if you’re denied
If you can’t qualify for an unsecured personal loan, then you’re unlikely to have success with other unsecured lending options. Balance transfer credit cards and Lines of Credit (LOCs) also both require a strong credit score to qualify at the right APR.
Equity lending options
If you are a homeowner, then you may consider options that allow you to borrow against the equity in your home. This includes options such as refinancing, Home Equity Lines of Credit (HELOCs), or a second mortgage.[3]
These lending options are secured using your home as collateral. Because the lender has the extra protection of collateral that they can liquidate in case of default, they may have more flexible qualification requirements. It may be easier to find a lender willing to work with you despite your weak credit score.
However, you must carefully consider whether the need is worth the risk. Borrowing against your home increases your risk because default could lead to foreclosure. In many instances, debt consolidation is simply not worth that risk.
Relief options that don’t require financing
If a proof credit score is preventing you from getting a new financing to pay off debt, then it only makes sense to seek out options that don’t require new financing. Instead of applying for a loan to pay off debt, you need to consider some alternatives:
- A debt management plan is a repayment plan that you can set up through a credit counselling organization. Creditors agree to reduce or eliminate the APR applied to your balances and accept reduced monthly payments through the counselling organization. You still owe your original creditors, but you pay them back in a more efficient way that works for your budget.
- A consumer proposal allows you to get out of debt for a portion of what you owe. A Licensed Insolvency Trustee reviews your finances to determine what you can reasonably afford to repay. Then they arrange a repayment plan that you and your creditors must adhere to.
- If the Licensed Insolvency Trustee determines during their review that you are insolvent, then they may recommend bankruptcy. Any assets that you own which do not qualify for an exemption will be sold. The funds will be used to pay off your creditors, then your remaining balances will be discharged.
While these options will have at least some negative impact on your credit, they often provide a more affordable means to get out of debt if you have bad credit. What’s more, since your score is already low, the impact would not be as drastic as it would be for someone with a high credit score.
You may decide that it’s worth taking a temporary hit to your credit score to get out of debt. You can avoid wasting money on high-interest charges and turn a page on your finances.
A debt relief specialist can help you consider these options based on your unique financial circumstances. This can provide peace of mind that you’re making the best choice for your finances and goals.