Debt consolidation loans are undeniably one of the most popular financial tools people often use to manage multiple debts. It’s a smart financial strategy especially for those dealing with several high interest credit cards-to combine them into a single loan with a fixed monthly repayment. However, it’s not easy to get your consolidation loan approved, especially at major banks. Your eligibility criteria relies heavily on your credit score.
If you are struggling with a similar situation then this is exactly where you need to be. Today we are going to break it all down for you, including;
- FICO score ranges that banks often consider
- The impact of your credit score on your loan terms (interest rates)
- How to get a consolidation loan with a poor credit score and how to qualify
Understanding What A Debt Consolidation Loan Is
A debt consolidation loan is a personal loan that’s used to pay off multiple existing high interest debts. It’s basically all about combining several loans into one with a lower interest rate. In a nutshell, debt consolidation will make your debt more manageable.
Most of the major banks and credit unions offer debt consolidation through unsecured loans and you don’t need any collateral for them. However, the approval isn’t guaranteed and especially banks rely a lot on your credit score when giving a debt consolidation loan. In simpler words, your credit score decides whether you are eligible for the loan or not.
Credit Score Ranges: What Do Banks Typically Expect And Require?
The FICO scoring model is used to assess and measure credit scores. It can be anywhere between 350-800. Here’s a breakdown of the FICO score ranges and what they mean to banks when approving your loans;
| Fico Score Range | Rating | Chances Of Approval | APR Offered |
| 720-850 | Excellent | High chances | 6% to 10% APR |
| 690-719 | Good | High chances | 10% to 15% APR |
| 630-689 | Fair/Average | Moderate chances | 15% to 25% APR |
| 300-629 | Poor | Low chances | Denied or more than 25% APR |
- 720+: With such a FICO score range, your chances of debt consolidation loan approval are quite high and you might as well get the best interest rates offered.
- 619-719: It’s quite a favorable score where you can easily secure a loan with reasonable interest rates but not the lowest.
- 630-689: It’s considered an average score and you might be able to qualify for a loan but the terms won’t be very favorable.
- Below 630: You’ll most likely have to explore other alternatives because the major banks won’t offer you an unsecured debt consolidation loan.
Impact Of Credit Score On Loan Rates And Terms
It’s not just with debt consolidation loans, in fact, no matter which loan you apply for, the lender will always first check your credit score. A high credit score signals that you are more likely to pay off the loan without any delays. It automatically translates into;
- Lower interest rates: You’ll be able to save yourself thousands on the interest in the long run especially with a high score.
- You’ll get larger loan amounts: With a high score, you can easily apply for larger loan amounts. Lenders are more comfortable in giving large loans when there’s less risk involved.
- Fewer fees: Some lenders might as well waive off the origination fee if you are a borrower with a solid credit score.
On the other hand, a poor credit score can really make it difficult for you to secure a debt consolidation loan. Even if you do, the terms won’t be very favorable and you won’t be able to get huge loan amounts. There’ll be more restrictions, stricter repayment terms and higher interest rates;
- Loan loan limits: You most probably won’t be able to get a loan that can cover all of your debts.
- Higher interest rates: A poor credit score means more risk for the lender and the interest sometimes exceeds 25% which defeats the purpose of debt consolidation.
- Rejection: Major banks usually decline and reject loan applications of people with a poor credit score.
What To Do If The Credit Score Is Too Low?
In case of a poor or below average score, major banks will most probably deny your loan approval application but there’s nothing to panic about. Here are some important steps you need to take after rejection;
1-Review Your Credit Report For Any Errors
The very first step you need to take is to review your credit report and look for errors. You can easily request a free credit report from any platform, i.e, AnnualCreditReport.com.
Check for;
- Incorrect information of your account
- Any fraudulent activity
- Any negative remarks that are outdated
In case you find any inaccuracies, dispute them instantly and get them fixed to improve your score.
2-Pay Off Your Revolving Debt
High credit utilization ratio brings your credit score down which is why it’s of utmost importance to pay off all your pending credit cards on time and bring the credit utilization ratio to below 30%.
3-Try Getting A Secured Loan
In case of a poor credit score, the smartest move you can make is to get a secured loan that’s backed by your savings account or other assets. Getting a secured loan is a lot easier as it comes with a collateral.
4-Search For Online Lenders And Credit Unions
Credit unions can be your best bet even if you have a poor score because these unions offer more lenient loan approval standards. Also, try searching for reliable online lenders who specifically deal with poor credit scores.
5-Opt For A Co-Signer
If you have a trustworthy family member or a friend, use them as your co-signer to increase your chances of getting a loan.
6-Work On Your Credit First
The wiser decision is to work on your credit first and improve it to get a debt consolidation loan. All you need to do is to pay your dues on time, keep your credit utilization ratio low and pay off any other debt you owe. Take 3 to 6 months, work on your score and once you improve it, you can then re-apply for a consolidation loan.
Overall Verdict
Without a doubt, debt consolidation is a smart strategy you can use to manage multiple debts but it’s only useful if the terms are in your favor. With a poor credit score, you won’t be able to secure a low-interest loan and you might not even get a huge loan amount to pay off the rest of your loans. In a nutshell, it’s really of no use to get a consolidation loan with a poor credit score. The best thing you can do is to first improve your credit score, try financial counseling if it’s hard for you to manage your finances.
Almost all major banks require at least a 680 FICO score and the best rates are mostly reserved for those with a 720 score. If your score is low, there are multiple other alternatives you can try but first take 3 to 6 months, improve the score and secure a loan with favorable terms.
FAQs
Q1. Will Applying For A Debt Consolidation Loan Hurt My Credit Score?
Yes, applying for a debt consolidation loan involves a hard inquiry which can bring your credit score down but it’s all temporary. Once you secure the loan, you can then take certain measures to improve it over time. All you have to do is to pay your dues on time, keep your credit utilization ratio low and try to avoid any more loans.
Q2. What Will Happen If I Miss A Payment On My Debt Consolidation Loan?
Missing your payments on a debt consolidation loan can wreak havoc on your credit score and you’ll end up into deeper debt as well. Here are some consequences;
- It’ll damage your credit score
- You’ll face late fees and penalties
- Collection activity or default
If you are struggling to make your payments, it’s best to contact your lender and ask if they offer any hardship programs.
Q3. Can I Get A Debt Consolidation Loan With A Bad Credit?
Yes you can but when it comes to the major banks, your application will most probably be rejected. If your score falls below 630, here’s what you can do;
- Look for online lenders who specialize in loans with poor credit
- Look for credit unions that offer more flexible terms and criterias
- Opt for a co-signer to increase your chances of loan approval or simply apply for a secured loan.
With a poor credit score, you should expect higher interest rates and less favorable terms when applying for a loan.
Struggling with getting a debt consolidation loan due to poor credit? Learn about other debt relief solutions with Mountains Debt Relief. Contact Now for the best consultation!