How to Get Debt Consolidation with Bad Credit

When you have debt on more than one credit card, a common solution to managing payments is to get a debt consolidation loan. But, if you’ve fallen behind on your monthly bills or have multiple outstanding credit card accounts and other debts, your poor or bad credit history will affect your ability to consolidate your debt at a reasonable interest rate. This may make you consider seeking a bad credit debt consolidation loan.

There are lenders who specialize in offering debt consolidation loans to those with bad credit. However, there are several questions you should ask before applying for a new consolidation loan. Why? Because every time you apply for a loan, it is known as a hard hit into your credit report. Multiple applications will then lower your credit score even further.

So, it is important to think through all your bad credit consolidation options before proceeding with any solution. In addition, you owe it to yourself to compare the costs of a debt consolidation loan with other debt relief options if you have high unsecured debts and poor credit. Other options would include a debt management plan and a consumer proposal.

Affordable Monthly Consolidation Payments

Debt consolidation means taking out one new loan and using those funds to repay multiple, older debts.  If the interest rate on your consolidation loan is lower than what you are paying now, your payments should go down. However bad credit consolidation loans typically come with a high interest rate, often as high as 12 to 18%.

If you are currently only making minimum payments on your credit cards, and your credit card bills are increasing each month, then even a debt consolidation loan may not balance your budget. The more debt you must consolidate, the less likely that a debt consolidation loan will be affordable in the long run. If you miss payments on your new consolidation loan, your credit score will deteriorate even further.  You will then no longer have any borrowing options.

Before applying for any loan, prepare a budget. Use an online loan calculator to determine the maximum amount of monthly payments you can afford without continuing to go into debt. If you cannot find a loan that fits your budget, then consider alternatives such as a debt management plan or a debt proposal to your creditors. Both options allow you to lower your monthly payments even further although they come with other considerations.

Secured or Unsecured Debt Consolidation?

Generally, if you have bad credit, a traditional debt consolidation loan will work if you can provide collateral like a vehicle or home equity. Secured consolidation loans like a home equity line of credit or car loan usually offer a lower interest rate. An unsecured debt consolidation loan may result in an interest rate and monthly payments that may not be low enough to allow you to repay your debts with interest.

Also, the larger your debt consolidation loan the more challenging it will be for you to keep up with your payments. Bad credit consolidation loans above $15,000 are risky.

If after budgeting, you calculate that debt repayment with interest  through a consolidation loan is too expensive, you may consider learning more about how a debt management plan or consumer proposal can help you eliminate your debt obligations more affordably.

Debt Consolidation with a Debt Management Plan

If you have a low credit score, you may be able to consolidate your debt with a debt management plan (DMP) through a not-for-profit credit counselling agency. A credit counsellor will negotiate with your creditors to achieve an interest-free period or an interest rate reduction. This would allow you to repay your debts at a lowered cost. But, you would still have to repay the entire debt amount. Your credit counsellor will create a payment schedule for you to repay your debts within 3 years. And you must pay your debt in full in that time.

A debt management plan can be good if you’re looking for interest relief. However, a potential risk to a DMP is that not all your creditors agree to have debts combined into the program. In this case, you would have to ensure that all your creditors are being paid outside the debt management plan as well.

While a debt management plan can be a good debt consolidation option for bad credit, it only allows certain debts to be consolidated. If you have payday loan debt or income tax debt to discharge as well, then a debt management plan will not be enough to achieve complete debt relief.

 If you have multiple forms of unsecured debt such as payday loans, income tax, and credit cards or line of credit, a better option for debt consolidation might be a consumer proposal.

Debt Consolidation with a Consumer Proposal

A consumer proposal allows you to consolidate many forms of unsecured debt, interest free, and you repay only a portion of the debt you owe. A Licensed Insolvency Trustee negotiates with your creditors repay the agreed settlement amount over a period of up to 5 years in exchange for which you keep your assets. You make one consolidated payment to the Licensed Insolvency Trustee who remits the agreed upon settlement to your creditors. A consumer proposal is usually the lowest cost debt consolidation option for those with poor credit.

Once the majority of your creditors agree to a consumer proposal, it is binding on all of them. It also puts an end to harassing calls from creditors and any legal action taken against you like a wage garnishment.

How Can I Rebuild My Credit?

Whatever debt consolidation solution you choose, you do have the ability to improve your credit rating after you’ve completed a repayment plan.

Improving your credit score involves a few steps. As you work through your consolidation program, you should:

  • Monitor your credit report for errors and omissions and send necessary documents to the credit bureau to have any mistakes corrected
  • Apply for a secured credit card to re-establish a pattern of repayment
  • Keep all your bill payments current and pay any balances in full each month. This includes any new debt consolidation loan you obtain.
  • Limit your credit consumption

If you’re having trouble staying on top your credit card debt payments and your credit score is limiting your ability to get a more affordable loan, you might benefit from meeting with a Licensed Insolvency Trustee to discuss all your options.  Look beyond a high cost bad credit debt consolidation loan.

A Trustee will review your finances with you and answer all your questions. Your initial consultation is free, so contact us today.

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  4. Should I Get A Debt Consolidation Loan: FAQ Video
  5. Top 5 Alternatives to Bankruptcy in Canada

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