Debt consolidation loans allow you to pay off some of your current debts and make a single payment to your new lender. These loans can be helpful in some situations, but if you already have bad credit you may not be able to get a new consolidation loan or obtain good terms on the loan offers you do receive.
Consolidation Loans
A consolidation loan is very much like any other kind of loan, in that you have to apply to a lender for the loan and then go through the approval process. Lenders determine the criteria individual borrowers need to get a loan, and typically use a combination of factors, such as your income level, income-to-debt ratio and your credit score.
Credit Scores
Your credit score is an important part of your ability to obtain new loans, though each lender determines what credit score you need before you're eligible to receive a loan. One commonly used score, the Fair Isaac's Company score or FICO score, ranges from 350 to 800 according to the Federal Citizen's Information Center. A score of 700 or higher is generally considered a good score, while anyone with a score below 600 is considered a risky borrower.
Terms
Even if you do get a consolidation loan with bad credit, your loan terms are likely to be much worse than those offered to a person with good credit. For example, according to Bankrate, the best balance transfer credit cards on March 16, 2011 offered regular interest rates of from as low as 10.9 percent to as high as 22.99 percent. Applicants with a bad credit score would likely receive a higher rate than those with a good score.
Other Options
If you already have a poor credit score, you've likely had several credit problems, such as not paying your bills on time or going through a bankruptcy. If you are unable to manage your credit responsibly, taking out a consolidation loan is usually not a good option. Consolidation loans do nothing to lower your debt load, and can even increase how much you owe in the long run. Talk to a financial adviser if you need assistance with a debt payment strategy before committing to a consolidation loan.
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