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In a nutshell, a debt consolidation loan involves a customer taking out one large loan to pay off multiple small debts at once. These loans are typically extended by financial institutions as personal loans that cover all outstanding debts of a person. Once the borrower has used the immediate funds to pay off his/her creditors, they then pay back the financial institution in periodic principal and interest payments just like a regular loan. In essence, the smaller debt components get accumulated into one large debt piece that is typically offered at a lower rate of interest, thus providing both financial and efficiency benefits.

It is important to remember that there are two types of debt consolidation loans: secured and unsecured. Secured loans require the borrower to put up some personal asset as collateral, which can be claimed by the lender in the event of default. Unsecured loans, on the other hand, are not secured on any personal asset, implying a higher risk for the financial institution. This higher risk translates into a higher rate of interest as well to compensate the lender for the additional risk undertaken.
Thus, when lenders evaluate potential borrowers who are looking to take out a debt consolidation loan, there are four main criteria that they would use to make their decision: proof of income, credit history, financial stability and any assets or equity.

• Proof of Income:Whether the loan is secured or unsecured, this is the key metric used to determine the borrower’s financial capabilities to regularly meet interest and principal repayments as they come.
• Financial Stability:A secondary, but equally important consideration is the borrower’s current financial stability. If the borrower can show predictable expense patterns and/or additional sources of income, they are more likely to be approved for the eventual debt consolidation loan.
• Credit History:As with any other personal loan, a higher credit score offers the benefits of more attractive pricing terms to the borrower as the lender has greater confidence in repayment based on historical precedent.
• Equity:Though most debt consolidations are done on an unsecured basis, offering equity collateral can significantly increase the borrower’s chances of approval and getting a lower rate of interest on the debt consolidation loan. This does have its own risks as explained later in this article.

In terms of what type of debt can be classified as eligible to be consolidated, there are certain parameters set out that vary by financial institution. As a general rule of thumb, the following types of credit are generally able to be merged together as part of the debt consolidation loan:

• Credit Card Debt: In USA alone, there are 3 billion credit card transactions made every year. An Equifax report stated that these originated from 31 million individual accounts, of which 30% didn’t pay back the credit card balance at the end of each month. Annually, this is approximately $7 billion just in interest for late payments.


• Public Utility Debt: Public utilities include water (hydro), electricity, natural gas, telephone services and other essentials provided by a specialist provider. Typically, these companies charge the consumer at the end of each month with payments due within ~2 weeks. The debt from these can be bundled into a debt consolidation loan.


• Other Consumer Loans: Broadly speaking, consumer loans are debts taken out for a multitude of purposes including auto loans, student loans, and other personal loans.

While your options will be more limited, it is possible to get debt consolidation loans with bad credit. The only issue is you may need to shop around a bit, and your interest rates could be higher.
If you want easier access to a debt consolidation loan and better rates, you will want to improve your finances in a few ways. Debt consolidation lenders don’t only look at your credit score. They will consider your debt to income ratio as well. So, tackling your credit card debt and clearing any small debts you have, will help you access loan consolidation with bad credit.

There are several advantages to consolidating your debt. First, you can often get a better rate that reduces the overall cost of your repayments. You will also have an easier time dealing with one, single, large debt than you will have dealing with multiple smaller debts. This makes it easier to keep up with minimum payments and avoid rising costs. In this way, debt consolidation also helps you protect your credit score.