5 Alternatives to Debt Consolidation Loans for Bad Credit

Debt consolidation loans are a great solution if you have multiple debts. You can roll all your balances into just one monthly payment while getting a lower interest rate, enabling you to get out of debt cheaper and quicker.

Unfortunately, if you have bad credit, such a loan might not be accessible to you. You either won’t qualify, or you will qualify but you will get a crippling interest rate, which defeats the purpose.

The good news is that you can pursue other options. Below are just 5 alternatives you can explore if you can’t get an affordable debt consolidation loan due to bad credit.


Credit card refinancing

One alternative is to use a balance transfer credit card. Such credit cards do not charge any interest for a certain number of months (usually 6, 12 or 24).

If you transfer your balance(s) to this new card, you will be free for several months to pay off your debt without accruing additional credit card interest — giving you breathing room to make actual progress toward eliminating your debt.

Note that this option is not for everyone who has bad credit, but only those whose credit is lackluster but still good enough to get solicitations for balance transfer credit cards. It is not easy to get approved for a new card if your credit is poor and opening a new card can further erode your credit score.

To make the most out of this alternative, you must be committed enough to pay off the whole balance before the zero-interest period is over. Otherwise, the card turns into another source of debt.

You must also have the self-discipline to not use your credit cards at all while paying off your debt.


Debt management plan

If you enter a credit counseling program, one of the options the counselor might suggest is a debt management plan.

With a debt management plan, you can qualify whatever your credit score is.

Here, the counselor will negotiate with the creditors on your behalf. You might get lower interest rates, reduced penalties, or waived late fees in exchange for a stable repayment plan.

This repayment plan will last from 3 to 5 years, during which you have to make a single payment to the counselor each month. The counselor will take care of distributing the payments to your creditors.


Second mortgage

If you own a house and have built up equity, you can use that equity as collateral for a home equity loan or line of credit (also called a second mortgage).

Needless to say, by going this route, you’re putting your home on the line, so be careful. If you don’t make timely payments, your home will get foreclosed.


Debt settlement

With debt settlement, your creditors might agree to lower your balance if you pay in a lump sum.

This option is available to consumers with bad credit and can help you quickly get rid of your debt while saving a lot of money.

Note, however, that your credit score will take a big hit with this alternative because credit reporting agencies treat the unpaid money as a demerit. Your credit score will drop by 75 to 100 points and the damage may last for years.

If you still want to proceed, you typically need a third-party company to handle the debt settlement.

Initially, creditors will likely be reluctant with this strategy, especially if you’re arranging it yourself. You may get intimidating collection letters and phone calls, but after some time, before they sell your debt to collection agencies for cheap, they might agree to settle with you so that they can make more money.



Filing for bankruptcy should be your last resort, only when it is clear that all other options won’t be able to get you out of debt.

There are two kinds of bankruptcy: chapter 7 (aka liquidation bankruptcy) and chapter 13 (aka reorganization bankruptcy).

Chapter 7 lets the bankruptcy trustee sell your assets to cover as much debt as possible. Some assets are exempt, however, such as your house, furniture, cars, clothes, and retirement accounts. The creditors must then accept the proceeds as payment.

If you exceed income limits for chapter 7, you need to file for chapter 13. With this kind of bankruptcy, you can create a 3-5-year repayment to partially cover your debts, but the court should agree that the repayment is sufficient to erase the debt.

With a bankruptcy filing, you can wipe away your debts, but your credit score will suffer for 7 to 10 years.


Bottom Line

Getting out of debt through a debt consolidation loan is a good move but it is not available for everyone, especially those who have bad credit.

You have other options to pull yourself out of debt, however, such as credit card refinancing, debt management plan, home equity loans or lines of credit, debt settlement, and, as a last resort, bankruptcy.

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