What You Need to Know About a Debt Consolidation Loan If Your Credit Score Is Below 580

Debt consolidation loan if your credit score is below 580

If you’re considering a debt consolidation loan and your credit score is below 580, you may wonder what options are possible. Let’s be honest: When you have a lower credit score, getting a loan can be a challenge. Your credit score reflects your creditworthiness, which isn’t a judgment on your character: it is a simple numeric representation of how much risk you present to a lender, driven by your past financial habits and history. When you have a low score, lenders typically conclude you are not a good bet to repay a loan and may therefore reject you.

This can feel like a Catch-22: You want to pay down your debt but can’t get the helping hand you need to do so. But, take a breath: Getting approved for a debt consolidation loan with a credit score below 580 is not impossible. Some lenders target “sub-prime borrowers” by accepting low credit scores and charging higher origination fees and interest rates. That’s a trade-off that some borrowers are willing to live with, but it may not be a cost-saving move. Read on to learn more so you can plan your best financial move.      

Evaluating the Cost of Your Debt

Most people know how much they owe (though some would rather not when debt piles up). Credit card balances show up on monthly statements and also available on demand inside the credit company’s mobile app. Some consumers check them daily, particularly if they regularly use their credit cards for purchases. This vigilance can be helpful, but it doesn’t tell you everything.

The “cost of debt” is the amount you pay in interest and fees (that’s your APR, or annual percentage rate) to maintain an unpaid credit card or loan balance. It’s an important number in debt consolidation because one of your objectives when consolidating debt should be to lower the cost. That means getting a lower interest rate and more reasonable payment terms. We’ll get into that more below.

Credit card cost of debt is variable because credit card interest rates are variable. At the start of 2024, the average rate was a whopping 24.59%. If you’re looking to pay off that kind of high-interest debt, know that consolidation loans if your credit score is under 580 will likely have a high fixed rate of interest and expensive fees. A particular offer may or may not be a good deal for you.

How to tell? You’ll need to do the math on whether the cost of that debt is more or less expensive than the cost of the debt you’re currently carrying. For that, you may want to use one of the many debt consolidation loan calculators available to help you through the numbers so you can easily compare options.

Review Your Monthly Budget

After crunching the numbers, you may find that getting a debt consolidation loan with a credit score under 580 is cost-prohibitive. That’s okay. It’s not your only option and you don’t need to do it today. There are steps you can take to improve your credit score and pay some of your debt down before applying for a debt consolidation loan. You can start with your budget.

Use a budget app if you want to, or just input all the numbers into an Excel spreadsheet. If you’re old school, do it with a pen and paper. List out all your monthly expenses. Separate them into “essential” and “non-essential” categories. Be realistic when you do that. Are those premium movie channels essential? You can probably live without them — especially to help you get out of debt and stabilize your financial situation.

Once all your expenses are listed in one place, look for things you can eliminate. Stop eating out all the time or ordering takeout so much, and cook at home. Work from home to save on travel expenses if you have that option. Bundle your home and car insurance to save money. The idea here is to create more spending bandwidth that you can use to pay off your outstanding debt.

Note: Remember that on-time payments are a key contributing factor when working to build your credit score. Automate payments or set reminders to make sure you hit your marks deadline-wise.

Calculate Your Debt-to-Income Ratio

Applying for a debt consolidation loan if your credit score is below 580 will likely result in a rejection from a traditional bank. A credit union or an online lender will be more likely to do business with you, but they’ll want to know what your debt-to-income (DTI) ratio is. That’s a simple calculation that compares how much you owe to how much you make.

DTI carries more weight with lenders than credit scores do. A debt-to-income ratio is a real-time number that divides your monthly debt payments by your monthly gross income. Both variables can change frequently, so DTI is more current than credit scores.        

Take a moment to calculate your DTI. Lenders like to see it at 36% or under, with not more than a third of that debt going to rent or mortgage payments. Anything over 43% will likely disqualify you for a loan or mortgage, so you’ll want to pay some of that debt down. Go back to the budgeting exercise in the previous section to figure out how to do that.

Ask Around for a Cosigner to Help You

Someone in your circle will likely have a better credit score than you do. Ask if they’d be willing to cosign a debt consolidation loan for you. This is not just for rejected loan applicants. A debt consolidation loan with a credit score under 580 will be cheaper if you have someone with a higher credit score cosign it. That reduces risk in the lender’s eyes.

However, agreeing to be a cosigner is a leap of faith. The cosigner becomes responsible for the debt, so if you can’t make your payments, it’s their credit and money that’s also on the line. A close friend or family may be willing to cosign, but proceed with caution: This may strain the relationship. Carefully consider that before asking someone to do this. Go back through your budget again, review any loan offers you’ve received, and make sure there isn’t a better option. This is a big commitment for you and your cosigner.

Paying Down Your Debt With a Low Credit Score

Let’s wrap things up with a little motivational advice: Applying for a debt consolidation loan with a credit score below 580 is not an admission of financial failure. It’s an act of courage that could set you on the road to financial freedom. Remember that when you’re negotiating terms and conditions. Most lenders can come up with a better offer if you push. If not, there are other lenders out there.

If that doesn’t pan out, you still have other options, such as speaking with a counselor at a nonprofit like National Foundation for Credit Counseling (NFCC.org), pursuing debt settlement, or considering bankruptcy as a last resort.

Remind yourself that many others are or have been in this situation, and with hard work and patience, there can be a solution.  

Kevin D. Flynn

Kevin D. Flynn

Kevin D. Flynn is a former financial professional, business coach, and freelance financial writer. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and ten wonderful grandchildren. When he’s not working, you’ll find him at the golf course or on his back porch reading classic sci-fi novels.

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