Debt consolidation combines multiple monthly payments into a single loan with a fixed interest rate. For people drowning in credit card debt, this can be a practical way to organize bills and potentially lower the total interest you pay, since credit card rates are typically much higher than personal loan rates.
The challenge is that most lenders prefer borrowers with good credit. If your credit score is low, approval becomes harder and the interest rates offered to you will be higher. But it's not impossible. Some lenders specialize in working with people in your situation.
Online lenders and fintech companies often have more flexible credit requirements than traditional banks. Many use computer-based systems that look beyond just your credit score—they also consider your income, employment history, education, and cash flow. Because these companies have lower overhead costs than brick-and-mortar banks, they can afford to take on borrowers with weaker credit profiles.
Credit unions are another option. As member-owned nonprofits, they tend to have more lenient credit requirements and sometimes offer specialized "fresh start" loans designed to help people rebuild.
If you apply for a debt consolidation loan, the lender will usually send the funds directly to your creditors on your behalf. You provide the lender with each creditor's contact information and the amount owed to each, then you repay the single consolidation loan instead of juggling multiple payments.
Keep in mind that applying for any loan triggers a hard credit inquiry, which temporarily lowers your credit score by a few points. Most of the time this effect fades quickly if you manage the new loan responsibly—making full payments on time and avoiding new lines of credit soon after.
If your credit is very weak, adding a cosigner with better credit can significantly improve your chances of approval and may help you get a lower interest rate. Just be clear that the cosigner becomes legally responsible for the debt if you don't pay.
You can also try to secure the loan with collateral, such as a savings account or vehicle. This makes lenders more comfortable approving you, but it puts your asset at risk if you can't make payments.
Before applying, take steps to strengthen your position. Check your credit score so you know what you're working with. Then focus on paying all your bills on time and in full each month—payment history makes up 35 percent of your credit score and is the single biggest factor lenders look at. Even a few months of on-time payments can improve your score by 20 to 50 points.
Also try to lower your credit utilization rate, which is the amount of credit you're using divided by your total available credit. If you can get this ratio below 30 percent, it helps your approval odds. Below 10 percent gets you the best rates. You can lower your ratio by paying down balances or asking your credit card issuers to raise your limits.
Debt consolidation isn't right for everyone. If you can't control your spending habits, taking on a new loan may just lead to more debt. It also makes sense only if the interest rate and loan term result in lower overall costs than what you're currently paying. Compare the interest rate, fees, repayment length, and any penalties for early payoff.
Source: https://www.cnbc.com/select/best-debt-consolidation-loans-for-bad-credit