How to Get a Debt Consolidation Loan with Bad Credit | Simplify Your Debt

Most American households- almost 83 percent- have debt. Among these, nearly 57 percent have mortgage debt while some 60 percent have credit card debt. While there’s no demographic data on American ethnic communities that’re in higher debt, some research indicates that middle income group and lower income group account for the bulk of loans and credit.

While household debt is common and nothing really to bother about, it could assume worrisome proportions, should you be unable to make timely repayments. All debt can become a bane should you default, because it attracts late fees and penalties. And if you fail to repay, the lender could initiate recovery proceedings. These include calls or visits by recovery agents and expensive lawsuits.

Worse, you stand the risk of being declared bankrupt- an ignominy- which severely limits your abilities to avail future credit and loans or could even lead to liquidation of assets, in worst case scenarios.

Unfortunately, several American households, or about 3.5 percent of the national population, defaults on debt, according to latest figures.

Should you be one among those unable to service loans or debt for any reasons such as loss of job or any emergencies, there’s one alternative available to avoid credit score being severely damaged or any litigations. 

That alternative is debt consolidation.

Understanding Debt Consolidation

In simple words, debt consolidation means combining all your debt into one single, large sum and repaying it. That means, you’ll be paying a single lender instead of multiple ones every month or billing cycle.

Generally, debt consolidation works if you’re in any of these situations:

• Have two or more high-interest debt
• Have two or more credit cards with outstanding dues
• Your income is limited and debt takes away the major portion
• You wish to avoid default and its consequences such as poor credit score and lawsuits
• Will be leaving USA to work elsewhere, making it difficult to service various lenders from the new location
• Want to eliminate debt quickly

If you have any of these reasons, you could consider debt consolidation. That helps you to service debt at much lower interest rates. This translates as greater savings and above all, peace of mind since you wouldn’t be facing recovery agencies or lawsuits for default. 

However, it’s worth adding that once you consolidate debt, never go for more in the form of loans or credit cards or other such liabilities that could negate its effects.

Workings of Debt Consolidation

Debt consolidation works in many ways, depending on your financial status at the given point of time. There’re several ways that Americans go for debt consolidation. Some 53 percent of all US households with loans opted for debt consolidation in 2024, according to various sources online.

Here’s how it works.

For debt consolidation, you’ll have to take a loan at a lower interest from a bank, credit union or other financial institutions. Some banks and credit unions also offer debt consolidation loans. This means, they “buy out,” your loans or debt from multiple lenders and offer a single, consolidated amount that you’ll need to repay over the agreed span of time.

The average interest rate on debt consolidation loans in the US runs between six percent and 20 percent. However, in some cases, the interest rate might prove to be cheaper than the 36 percent that sometimes are applicable on credit cards or other loans for those with poor credit scores. 

Therefore, I recommend you meet your banker to assess whether or not you should go for debt consolidation. The banker will usually work out how much you owe various creditors with interest and work out a loan amount that settles every single debt at a lower interest rate.

Debt Consolidation with Bad Credit Score

This evokes a pertinent question: how to get a debt consolidation loan with bad credit score. That’s a double whammy, if you ask me because debt consolidation is meant to help you prevent getting a bad credit score. 

Yet, if your credit score is already bad, it’s still possible to get a debt consolidation loan. It might not prove to be an easy task or cakewalk, but definitely, it would prove worthwhile.

Comprehend this fully: getting a debt consolidation loan in USA with a poor credit score can prove very challenging and consumes lots of time and effort. However, in the end, these efforts and time consumed would prove worthwhile since you would be free of financial worries to a great extent because of zero debt.

Here’re some things that you could try to get a debt consolidation loan in USA with poor credit score.

1. Review & Analyze Credit Score

You can get a free credit score from your bank or agencies including Experian. However, a credit score only wouldn’t be sufficient. Therefore, have it analyzed by your banker or an independent expert. Such analysis contains details of repayment of existing debt, old debt and new debt, amount owed, credit mix and repayment history as well as the age of the credit score. These might sound complex but in fact are very simple. Yet, these factors hold a great significance when applying for debt consolidation loans.

2. Shop Around for the Loan

This might sound confusing again. However, when you decide to go for debt consolidation, the best thing you could do is shop around banks, credit unions and other lenders for best, lowest interest rates. That way, you would be paying much lesser to get rid of all those debts that eats your money through huge interests. There’re also banks, credit unions and lenders that have customized and special debt consolidation loans. Consider these but always seek advise from a banker or financial expert on whatever works out cheaper. There’s no point in paying a large amount merely to settle old debts.

3. Consider a Cosigner 

A cosigner could be your parent, spouse or sibling that has a good credit history and healthy credit score. Since the two of you are applying for debt consolidation, the application gets looked upon a bit more favorably than yours alone with poor credit score. Also, with a cosigner, you could be entitled to higher amounts of money for debt consolidation. Furthermore, you can get lower interests and better terms and conditions, including repayment schedules, if you have a cosigner with healthy credit score. But before you actually apply, make sure that both of you would qualify for such better terms and conditions on debt consolidation loans.

4. Check Prequals 

Yes, check prequalification for a debt consolidation loan. These prequals can help determine the terms and conditions for such loans and without any impact on your credit score. Generally, most large banks and credit unions offer such prequals for debt consolidation. Its common to try them first before buying into any.

5. Apply for Debt Consolidation Loan

And finally, apply for the debt consolidation loan, when you come across the best terms and conditions, interest and sufficient amount to cover all debt. Some Americans apply with two banks or lenders for debt consolidation but this could land you in some expenses and problems too. A lender might decline the loan if they learn you’ve applied from another source too.

Wrap Up

Debt consolidation loans are ideal to wriggle out of financial issues since they enable you to focus on only one creditor.  As a matter of fact, nowadays, Americans with healthy credit scores and sufficient money are also going for debt consolidations since it marks one more step towards financial freedom. An average American household has over $11,000 in debt and repays around $350 every month. Therefore, debt consolidation can help wipe out the amount and the money would come back to you in the form of savings. Regardless whether you want to exit debt or are looking for financial freedom, debt consolidation could help.