4 Ways to Consolidate Debt With Bad Credit

By Tom Burchnell
Consolidate Debt With Bad Credit

Wondering how to consolidate debt with bad credit? We’ve got you covered with this guide to get your finances back on track.

If you have more high interest debt than you’d like, you may be looking for ways to pay it off faster. Debt consolidation can help you do just that. 

Debt consolidation is the process of paying off all of your debts with one low-interest-rate loan or credit card debt. By paying off your debt at a lower interest rate, you can save money and get out of debt faster.

If you have bad credit, you may be wondering if you can even qualify for a debt consolidation program. Fortunately, you can—you just need to use the right financial tools. Below, we’ll explain the best ways to consolidate debt with bad credit.

How to Consolidate Debt With Bad Credit

Besides credit score, your debt consolidation option depends on factors like your income, assets, and retirement savings.

Depending on your specific financial situation, here are four ways you may be able to consolidate your debt with bad credit.

1. Apply for a Debt Consolidation Loan

A debt consolidation loan is simply a new loan you use to consolidate your existing debt or multiple loans. There are many types of loans you can use for this purpose, including:

  • Secured personal loans – Personal loans are a popular tool for debt consolidation. A secured loan comes with fixed interest rates and loan terms of one to five years. Many personal loans offer lower interest rates than credit cards, especially if you, as the borrower, apply with a good credit score. 

Unfortunately, it may be hard to qualify for a personal loan if you have bad credit. Even if your application gets approved, you may receive a higher interest rate than you hoped.
One way to increase your chances of getting approved is to apply for a secured personal loan, which will require some sort of collateral, such as your car or home. 

  • Home equity loans – Using a home equity loan to pay off debt is another method you can use. If you’re a homeowner, you may also be able to use your home equity loan for debt consolidation. This type of loan borrows money from your home equity.

Home equity loans have a comparably lower interest rate since they’re secured by your home. They also have a longer loan term, ranging from 10 to 20 years. If you have multiple loans, this type of loan can spread out your payments over a longer span of time, resulting in more affordable monthly payments.

To qualify for a home equity loan, you usually need a credit score of 620 or above. However, some lenders may be willing to look beyond your low credit score if you have a substantial amount of home equity, a reliable income, and a history of making your credit payments on time. 

  • 401(k) loan – Another loan you can use to consolidate debt is a 401(k) loan. This type of loan lets you borrow money directly from your 401(k) retirement account. If you have a substantial amount of money saved in your 401(k) account, you can borrow up to 50% of your current balance (up to a maximum of $50,000). 

Despite their many restrictions, 401(k) loans don’t have any credit score requirements. In turn, they may be a worthwhile option if you want to consolidate debt with bad credit or with the minimum credit score.

Need help getting a HELOC loan with low credit? Check out how you can boost your chances of getting a HELOC with bad credit.

Can You Get a Debt Consolidation Loan With Poor Credit?

As you can see, some debt consolidation loans are easier to qualify for than others. 

You can increase your chances of getting approved for a debt consolidation loan with bad credit by:

  • Fixing errors on your credit report – A quick way to give your credit score a boost is to dispute any errors that may be dragging it down. You can check your credit score and credit history for free once a year on If you notice any errors, dispute them with the associated credit bureau right away.
  • Reducing your debt-to-income ratio – In addition to your credit score, many personal loan lenders consider your debt-to-income ratio (DTI) during the application process. Most personal loan lenders require you to have a DTI of 43% or below. If you can pay down some debt and get your DTI even lower than that, you’ll increase your chances of getting approved.
  • Applying with a credit union – If you’re a member of a credit union, you’ll be happy to learn that they often have much more flexible credit score requirements than any traditional bank or online lender.
  • Shopping around for the best terms – If you aren’t a member of a credit union, you may still be able to find a flexible lender or creditor. You just need to do your research.

    Many lenders will let you apply for pre-qualification, which won’t have any impact on your credit score. By doing so, you can discover if you’re eligible for a specific lender’s debt consolidation loan and get an idea of what loan terms they can offer you.
  • Applying with a co-signer – No matter what type of financing you need, whether this may be debt consolidation refinance or a home equity loan, a co-signer can enhance your application. A co-signer is someone with excellent credit who adds their name to your application—typically a close friend or family member.

    Just keep in mind that your co-signer is held equally responsible for your debt payments. If you don’t make them on time, your lender will expect your co-signer to pay instead. Plus, a debt consolidation vs home equity loan are two different types of loans. So, keep in mind that the terms may vary.

2. Attend Credit Counselling

If you don’t think you can qualify for a debt consolidation loan, even after taking these steps, you may want to visit a nonprofit credit counseling agency. Your bad credit score won’t impact your ability to work with one of these agencies. 

Credit counseling agencies can help you pay off your debt faster by negotiating with lenders on your behalf. Your credit counselor will try to secure you a lower interest rate, a reduced loan balance, and fewer fees. 

Your credit counselor may also advise you on how to manage your debt. For example, they may suggest that you follow a specific budget, close certain credit accounts, or consider bankruptcy. With their guidance, you can get your finances back on track and get out of debt faster. 

3. Enroll in a Debt Management Plan

A debt management plan (DMP) is a special program offered by any debt settlement company or credit counseling agency. When you enroll in a DMP, your credit counselor will set up an affordable debt  repayment term with your lenders. They may also be able to cut your interest rates significantly.

During the DMP, you’ll only have to make one debt monthly payment. It will most likely be lower than the combined minimum monthly payments you owe right now. Participating in a DMP will get debt collection agencies to stop calling you. It will also put you on track to pay off all of your debt within three to five years.

Best of all, there’s no credit score requirement. Participating in a DMP won’t negatively affect your credit score, either. 

In fact, you may leave the program with a much better credit score than you started with. 

4. Participate in a Sale-Leaseback Program

Lastly, if you’re a homeowner, you can consolidate your debt with bad credit by using a sale-leaseback. With this type of program, you sell your home and lease it back, just as the name suggests. In doing so, you can convert your home equity into cash without taking out a loan.

Once you’ve liquidated your equity, a sale-leaseback program will enable you to:

  • Pay off your debts
  • Continue living in your home as a renter
  • Enjoy the option to rebuy your home in the future when you’re financially ready 

Sale-leaseback programs are ideal for borrowers with bad credit, since they’re asset-based. You can enroll in one of these programs even if you have a bad credit score or low household income. 

Customizable Solutions for Unlocking your Equity

If you’re looking for a sale-leaseback you can trust, consult a financial advisor to explore your options. Sale-leaseback programs can help to empower homeowners to achieve financial freedom through their homes.

What is the Best Way to Consolidate Debt With Bad Credit? 

Now that you know a few ways to consolidate debt with bad credit, you may be wondering which method is right for you. 

The best method for debt consolidation for bad credit will depend on your personal circumstances. However, if you’re a homeowner, a sale-leaseback program is a fantastic option. It can help you pay off your debt interest-free

Since the goal of the debt consolidation program is to pay off your debt at the lowest interest rate possible, using cash is much better than paying it off with a form of financing.

Key Takeaways

Wondering how to consolidate debt with bad credit? We’ve got you covered with this guide to get your finances back on track. If you are still unsure of alternative options to consolidate your debt, after reading this article, consult a financial advisor to discuss your options.


  1. Experian. What is the Best Term Length for a Personal Loan?
  2. Bankrate. Requirements for a home equity loan or HELOC in 2021.
  3. Investopedia. 4 Reasons to Borrow From Your 401(k).
  4. Investopedia. What Constitutes a Good Debt-to-Income (DTI) Ratio?
  5. NerdWallet. Debt Management Plans: Find the Right One for You.
Bad Credit
Debt Management
Tom Burchnell
Written by Tom Burchnell
Director of Product Marketing

This article is published for educational and informational purposes only. This article is not offered as advice and should not be relied on as such. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process. EasyKnock is not a debt collector, a collection agency, nor a credit counseling service company.