How to consolidate debts with bad credit

By   |   Updated 19 Sep 2023

debt consolidation loan for people with bad credit

Debt consolidation, sometimes also referred to as refinancing, is simply bundling up your various debts and taking a single loan to pay them off. You can consolidate consumer debt like multiple credit card balances, personal loans and other debts. Not only does it save money and spare you the stress, it can also help you manage your personal finances better.

However, when you have bad credit, you may be concerned that debt consolidation is not going to be possible since many banks are reluctant to lend to people with bad credit.

The good news is you can consolidate debts with bad credit.

Read on to find out what to consider when comparing the different types of loans available, plus their pros and cons.

The dilemma

Trying to get a debt consolidation loan when you have bad credit is one of those chicken-or-egg situations.

Having bad credit means a lot of banks won’t approve your application, especially ANZ, NAB, and the like. But you are still saddled with multiple debts — personal loans, credit cards, and maybe even payday loans — on which you are paying a lot of interest every month.

Defaulting on any one of those can make your credit even worse. Since rebuilding your credit score takes time, waiting for it to improve before consolidating debt means having to continue paying lots of interest.

A debt consolidation loan can help you get out of the mess and save some money in the process.

So if “mainstream” banks won’t lend to people with bad credit, then who will?

Non-bank lenders vs banks

  • Most banks won’t work with applicants with bad credit. That is the reality. For the best chance of success, consider applying with a non-bank lender like Jacaranda Finance or Swoosh, who have a track record of working with people with bad credit. Read more about how to get a loan with bad credit here.
  • Many non-bank lenders also may reject you. Online-only lenders like SocietyOne and MoneyMe will generally reject applications from people with bad credit.

Who can benefit from debt consolidation loans?

A debt consolidation loan can help if you are:

  • Struggling with multiple minimum payments to save your credit score.
  • Prioritising debt payments over other living expenses.
  • Worrying about being able to meet all your repayment obligations when they fall due every month.
  • Carrying multiple debt balances with very high rates of interest.
  • Unable to see an end in sight to whittling down a mountain of debt.

What can be consolidated?

You can use a consolidation loan to consolidate multiple types of debt.

  • Credit card debt
  • Various personal loans
  • Car loans
  • Medical bills
  • Buy now pay later accounts

Secured or unsecured?

Debt consolidation loans are of two types: secured loans and unsecured loans. Which is right for you?

  • Secured loans are backed by your assets or equity. Typically lenders use your car for security.
  • Unsecured loans do not need the backing of assets or equity. However, they are more difficult to get and generally have higher interest rates. They also have lower qualifying amounts compared to secured loans.

Pros and cons


  • Convenient. Have a single monthly payment instead of multiple payments.
  • Most debt consolidation loans have lower interest rates than credit cards, resulting in lower interest payments overall.
  • You can try to negotiate on the rates of interest, which is not possible with credit cards.
  • Having fewer accounts is easier to manage, so you can avoid incurring fees and penalties, and also improve your creditworthiness.
  • You may be able to pay it off sooner, get out of debt faster and reduce financial stress.


  • Bad credit makes it harder to get approved by a bank or non-bank lender.
  • Many lenders will not work with you, even more modern online-only lenders.
  • You’re more likely to be charged higher interest because of your increased risk profile.

What to avoid

Debt consolidation is a relatively simple process. Nonetheless, there are some things to knowingly avoid.

  • Applying for a balance transfer with bad credit will probably result in your application being rejected, which will be recorded on your credit report and cause your credit score to drop. Balance transfers are an option for debt consolidation when you've rebuilt your credit.
  • Paying more in fees and interest on a consolidation loan compared to your payments for individual card and loan balances. Ask your creditors how much it would cost in total to repay over a given period (same as the consolidation loan) and compare the total interest you would end up paying. Avoid taking out a consolidation loan that would actually cost more in the end.
  • Variable rate loans. Most debt consolidation loans have a fixed rate, which means you know that instalments are not going to increase over the repayment period. A variable rate opens the possibility of your rate going up.
  • Paying exit fees when you use your debt consolidation loan to pay off and close other loan accounts. Note that this may simply be unavoidable. In fact, you may want to incur the fee so you have one less loan or card to worry about.
  • Payday loans are a very expensive way to borrow money. There are better alternatives.
  • Lenders with a bad reputation should be avoided. Not only are they bad news for themselves, there’s a good chance they will ultimately be bad news for you. At Finty, we only work with established companies.


There are a number of alternatives you may want to consider instead of taking a consolidation loan. These include:

No Interest Loans (NILs)

NILs are available for people on low incomes as a way to offer them safe, fair, affordable credit. These loans are typically offered for meeting costs of essential goods and services, medical procedures, and car repairs. They can be for up to $1,500 with repayment periods of 12 to 18 months, depending on how much you can pay each month.

You can find NILs offered in more than 600 locations by over 170 participating organisations around Australia. You can probably find a local NILS provider where you live. People who have a Health Care Card or Pension Card or who earn less than $45,000 a year after tax, and have lived at your current or previous address for at least 3 months, can apply. You need to be able to show that you are able to repay the loan amount.

Guarantor personal loans

To get one, you have to find a guarantor, usually a friend or family member, who agrees to be responsible for the loan repayments in case you are unable to pay. Your guarantor is the security for your loan, which makes it less risky for the lender.

There are secured and unsecured guarantor personal loans. If you take a secured guarantor loan, the guarantor’s car will be the security for your loan. In the case of unsecured guarantor loans, your guarantor will have to make repayments if you don't. The latter carry a higher interest rate than secured loans.

Joint personal loans

The responsibility of a joint personal loan is shared between two parties. You may qualify for a lower interest rate loan if your co-signer has a better (higher) credit score compared to yours. One benefit of a joint personal loan is that you can get approved for a higher amount because you are combining two incomes.

Negotiate the interest rate on your existing debt

Sometimes this may be possible. Your debtors are seeking settlement, not default or revenge. So they may be flexible about negotiating with you, if you can offer them a convincing, workable plan for repayment.

Make savings elsewhere so you can pay the debts

You may want to tighten your belt for a while. Look for easy ways to make savings first, like cutting subscriptions and memberships you do not need or use. Avoid buying things you don’t really need and try to stick to a budget. Using coupons and saving on groceries will make a dent in your expenses too. When combined, these savings can free up some money to repay debt faster.

Increase your earnings

Can you sell some of your personal belongings online? How about considering a side hustle?