For someone juggling with multiple high interest debts, debt consolidation can be a smart move to simplify your finances. However, the process is a little trickier when you have a poor credit score. Especially if you are trying to get a consolidation loan from a bank, it can be a bumpy ride but with the right strategies, you sure will reach the final line. 

It’s a fact that traditional banks have stricter lending criteria and a poor credit score can become a barrier. All you have to do is to explore the workarounds including, getting a secured loan, applying with a co-signer or simply looking for other lending options. 

Today we’ll discuss everything from how to find banks offering consolidation loans with poor credit to what expectations you should set and when to apply for a secured loan. 

What Is A Debt Consolidation Loan?

A debt consolidation loan is a personal loan that’s used to pay off all your other multiple high interest loans including medical bills and payday loans. It’s a smart strategy that’ll help you manage your debt as you’ll only have to deal with a single monthly payment at a lower interest rate. It’s undeniably one of the most effective debt relief solutions. 

You can get a personalized debt consolidation loan from a bank in the form of an unsecured personal loan but some banks do offer secured loans as well (better for people with a poor credit score). 

Why Is Bad Credit A Problem For Banks?

All of the traditional major banks prefer low-risk customers especially the ones with; 

• Higher credit scores (above 670)
• Fair payment history 
• Lower debt to income ratio 
• A stable income 

On the other hand, bad credit is considered high-risk. Especially if your credit score is below 580, your bank will most probably decline your loan application because they fear; 

• Missed payments
• Higher DTI
• Charge offs and collections 

Even with a stable income, your bank can deny you a loan based on bad credit. 

What Realistic Expectations To Set When You Have A Bad Credit?

You should have realistic expectations when applying for a consolidation loan from a bank. 

• The bank will most likely reject your application for an unsecured loan and before trying again, it’s important that you first improve your credit score. 
• Even if you do qualify for a loan, you’ll have to face high interest rates
• You can increase your approval odds with the help of a co-signer
• It’s better to try your luck with credit unions and online lenders who specifically deal with bad credit borrowers. 

In a nutshell, it’s true that with a bad credit, banks aren’t your best bet but they aren’t your only option either so it’s important to first try your luck with other online lenders and credit unions. 

Secured Loans – A Viable And Smart Alternative

You can increase your chances of approval by applying for a secured loan. For a secured loan, you’d need to have collateral to reduce the lender’s risk. It can be anything including; 

• A vehicle that has been paid off
• CD account or savings 
• Home equity

It makes a lot more sense because with a bad credit you really don’t have many options and to secure a loan, it’s important that you first reduce your lender’s risk. With a collateral

• You are more likely to be approved
• You’ll be able to get a low interest loan
• You’ll lose your collateral in case of default 

Strengthen Your Application With A Co-Signer 

Applying with a co-signer with a good credit score can increase your chances of securing a debt consolidation loan at a bank. The credit and income of your co-signer will make your application appear stronger and you’ll be viewed as a less risky borrower. 

Pros

• It’ll increase your loan application approval chances
• It’ll help you secure a low interest loan 

Cons

• Your co-signer will be fully responsible in case you default
• It could stain your relationship with your co-signer in case you miss any payments

Even with a co-signer involved, it’s important for you and your co-signer to meet the bank’s DTI and income requirements. 

What To Do If The Bank Declines Your Application?

If your bank declines even after trying all of the above-mentioned solutions then you don’t need to panic. There’s a lot more you can do and explore to secure a consolidation loan. Starting with; 

• Credit Unions: It’s a fact that credit unions are more flexible when it comes to your DTI and credit score. As compared to traditional banks, credit unions do work with low credit borrowers. 
• Non-Profit Credit Counseling Agencies: If you don’t specifically need to take out a loan to improve your financial situation then try working with a non profit credit counseling agency. They can help improve your financial health by building a debt management plan (DMP) where you won’t specifically need to take out any new loan for debt consolidation. 
• Online Lenders: If your bank declines your application, try your luck with online lenders. All you need to do is to conduct proper research and find reliable online lenders who specialize in bad credit. 
• Secured Credit Building Loans: At the end of the day, your bank is declining the loan because of your bad credit so why not work on the credit first? For this, you need a secured credit building card that won’t help you consolidate your debt but yes, it’ll help you improve your credit over time. Once your credit score meets the bank’s requirement, you can then apply for the consolidation loan again. 

Important Steps To Consider Before Applying For A Loan

If you want to improve your chances of getting your loan approved then there are some important tips that can help; 

• Check Your Credit Report: Always review your credit report first before applying for a loan. Check if there are any errors or discrepancies. If you do spot some, dispute them with the credit union immediately and get them fixed. 
• Pay Down All Your Small Balances: Your credit utilization is an important factor for banks. If you want to keep it down, make sure to pay off all your small balances and dues. 
• Gather Proof Of Income: Almost all traditional banks require a proof of your income and employment before approving your loan. To increase your chances, keep the proof ready. 
• Create A Budget: Next step is to create a budget and show it to the bank/lender to convince them that you can afford to make the monthly payments. 

Overall Takeaway 

It’s possible to secure a consolidation loan from a traditional bank with a bad credit but it’s not as easy as it sounds. To have a reasonable chance, you’ll either have to apply with a co-signer or apply for a secured loan that requires collateral but the approval still isn’t guaranteed. 

The best solution is to be realistic and set reasonable expectations when you have a bad credit. If the banks aren’t helping out, try looking for online lenders or credit unions with flexible credit terms. What’s best is to first work on improving your credit and then applying for a loan to improve your chances of getting a loan. Understand that debt consolidation isn’t any silver bullet but if you take the right steps and use the right approach, you’ll end up on a smooth path towards financial freedom. 

FAQs

Q1. Is It Possible To Use A Secured Loan For Debt Consolidation?

Yes, you can use a secured loan (a home equity loan or a loan backed by a vehicle or an asset) to consolidate your debt. However, there’s risk because if you default, you’ll end up losing your collateral. 

Q2. Can I Get Approved With The Help Of A Co-Signer?

Yes, if your co-signer has a steady income and a good credit score, it can improve your approval odds and you might as well end up with a better interest rate. However, if you can’t pay off your monthly dues, your co-signer will be completely responsible for repaying the loan. 

Q3. Are Debt Settlement And Debt Consolidation The Same?

No, debt settlement and debt consolidation are two different debt relief methods. Consolidation involves combining all your debts into one (with a single monthly payment and a single interest rate). On the other hand, debt settlement is about negotiating with your credit to reduce your debt and in return you have to pay a lump sum of the total amount as per the agreement. 

Bad credit? No problem! If you still want to consolidate your debt if your bank declines then we are here to assist in all ways. Try Mountains Debt Relief to pave your way towards financial freedom.