Debt consolidation loan for bad credit

Having a high amount of debt as well as a poor credit history can create stress and anxiety for many people.  

Paying off multiple debts at once can be a financial strain, and any missed payments can further contribute to poor credit. 

If you’re looking for a finance solution to help you manage your debt while you work on your credit rating, a debt consolidation loan could be an option.  

These loans are specifically designed to, well, consolidate debt.  

They can allow you to bring multiple debts together into one manageable monthly payment. 

When used in the right circumstances, these loans can be a convenient option to help streamline payments while you build your credit rating back up. 

In this article, we’ll explore how debt consolidation loans work, as well as highlighting their potential benefits and considerations. 

What is debt consolidation? 

Debt consolidation is a well-established financial strategy used by many people in the UK. 

It involves combining multiple debts into a single loan, and therefore, a single payment.  

Usually, it’s done to simplify the repayment process and is intended to reduce the overall interest rate or monthly payment as far as possible.  

Instead of managing multiple debt accounts with different lenders, due dates and interest rates, a debt consolidation loan can enable you to combine your debts into one manageable, regular obligation. 

When pursuing debt consolidation, you can typically make an application for a completely new loan, often referred to as a ‘consolidation loan’.  

This loan is then used to pay off the existing debts under your belt, such as credit card balances, personal loans, dental bills, or any other outstanding obligations you can think of.  

By consolidating your debt, you can potentially benefit from a more structured repayment plan and a harness clearer financial outlook at the same time. 

There are alternative methods of debt consolidation, including taking out a personal loan, applying for a home equity loan, or transferring existing credit card balances to a single card which carries a lower interest rate.  

It's important to bear in mind that debt consolidation is not a solution which eliminates the debt you’re carrying entirely.  

Instead, it aims to simplify your repayment process, and potentially provide financial relief by mitigating the burden which comes with managing multiple debts alongside one another.  

Effective debt consolidation often requires responsible financial management, commitment to making timely payments, and addressing the root causes of debt accumulation to avoid falling back into a cycle of financial hardship. 

Can I get a debt consolidation loan with bad credit? 

Unfortunately, bad credit can work as an obstacle to tackling your financial situation. Obtaining a debt consolidation loan with a bad credit score looming over you can be more challenging than securing one with a stellar credit record.  

You’ll probably be aware that lenders typically consider creditworthiness as a crucial factor when they assess your suitability for a loan, and a poor credit history could result in you paying higher interest rates, being offered stricter loan terms, or even be denied a loan.  

However, you’re probably reading this because you have bad credit and would like to use a debt consolidation loan with to improve your financial circumstances.  

You’ll be pleased to know that, while there are challenges, it’s nowhere near impossible to get a debt consolidation loan with bad credit.

Secured Debt Consolidation Loan 

A secured loan requires you to put up collateral, such as a home or a car, to reduce a lender's risk associated with giving you a loan.  

If you have any valuable assets which can be used as collateral, this might increase your chances of approval, even if you’ve got bad credit.

Guarantor 

Having a trusted companion with good credit co-sign your loan can improve your chances of securing a loan.  

Keep in mind that your guarantor will be equally responsible for the loan you take out, and any missed payments can negatively impact both parties' credit scores. 

Specialised Lenders 

Some lenders on the market specialise in providing loans to borrowers with adverse credit.  

Specialist lenders like this are more likely to be familiar with your circumstances and can offer more tailored products. 

These lenders can be more flexible in their credit requirements, allowing you to access the loan you need despite your financial past.  

However, while one advantage is their flexibility, the products typically charge higher interest rates. 

Credit Unions or Community Banks 

Local credit unions or community banks may be more keen to work with borrowers who have bad credit, especially if you have a longstanding or pre-existing relationship with them.  

They may consider factors beyond the standard credit score assessment, such as your income and overall financial stability at the current moment. 

What’s the bottom line? 

Before applying for a debt consolidation loan, it’s advisable to assess your financial situation, create a realistic repayment plan you’ll be able to keep up with, and compare deals from multiple lenders.  

Additionally, it might be a good idea to take steps to improve your credit over time. 

You can improve your credit by making timely payments, reducing your overall level of debt, and addressing any errors you can find on your credit report.  

Building a stronger credit profile not only increases you chances of being accepted for a loan but can better the loan terms you’re offered in the future. 

In addition, seeking guidance from a financial advisor can also be beneficial if you’re not sure how to approach bettering your financial situation.  

As professionals in this space, they can provide personalised advice and help you explore the most suitable options based on your circumstances. 

How do debt consolidation loans work, exactly? 

Debt consolidation loans operate by combining multiple debts into a single loan, often with a lower interest rate and a more manageable repayment structure.  

So what does that entail? 

Taking stock of current debts 

Assessing your existing debts can allow you to get an overview of your financial health. 

Things like credit card balances, personal loans and dental outgoings are the kind of obligations it can help to be mindful of.  

Determine the total amount owed on each debt, the interest rates which are at play, and the overall monthly payment obligations for each separate debt. 

Research and compare  

Research different lenders who are offering loans, as well as the products which are available for debt consolidation.  

Compare interest rates, each loan term, any associated fees, and the relevant eligibility criteria.  

Better still, look for lenders who specialise in debt consolidation or cater to individuals with bad credit. 

Make an application 

Once you've chosen a lender, complete the loan application process in full. 

The lender you approach will typically require lots of personal information, financial details, as well as information about the debts you want to consolidate with the loan you’re given.  

Be prepared to provide documentation like proof of income, identification, and account statements dating back several months. 

Loan approval and fund disbursement 

Once you’ve submitted all the important personal information, the lender will review your application, credit record, and financial situation to determine your eligibility for the debt consolidation loan.  

If you do get approved, you'll receive the funds you’ve borrowed either in a lump sum or directly paid to the relevant creditors. 

What are the key benefits of debt consolidation loans? 

• Instead of juggling multiple debts simultaneously, you'll have a single loan to manage, making it easier to keep track of payments. 

• If the debt consolidation loan offers a lower interest rate than your existing debts do, you could save money on interest charges over the life of your new loan. 

• Debt consolidation loans can lower your monthly payment amount, freeing up better cash flow to tend to other financial needs. 

• Making consistent, on-time payments towards the debt consolidation loan you take out can positively impact your credit score over time, if you work hard at keeping on track.

Are there any alternatives to debt consolidation loans? 

As is the case with any personal finance tool, yes, there are alternative options to debt consolidation loans.   

Debt Management Plan (DMP) 

A DMP is a program offered by credit counselling agencies and non-profits like StepChange. The government or your local council can sometimes help you too.  

Generally, they help you to work with your creditors to negotiate lower interest rates, reduced fees, and revised payment terms which better suit your circumstances.  

You can even make a single monthly payment to the credit counselling agency, which then distributes the funds to your creditors on your behalf.  

DMPs can be suitable for people who can afford to make regular payments and want professional assistance in managing their debts to ensure they stay on track.

Balance Transfer Credit Card 

If you have a relatively manageable level of debt, a balance transfer credit card could also be an option.  

These credit cards allow you to transfer the balances from existing high-interest credit cards to a new card which carries a much lower or zero introductory interest rate.  

This product can provide temporary relief by consolidating debts onto a single card.  

However, be mindful of the balance transfer fee that may be payable as well as the regular interest rate which can be tacked onto your balance once the introductory period comes to an end. 

Contact your lender

If you’re stuck and could benefit from some assistance, it's worth reaching out to your lender directly to discuss any alternative repayment options which they can draw up for you.  

Some creditors might be willing to negotiate lower interest rates, extended payment terms, or even partial debt forgiveness if your situation warrants it.  

Exploring this option requires you to master effective communication, as well as demonstrating a genuine commitment to resolving your debts. 

Personal Budgeting and Debt Repayment Strategy 

Creating a robust budget for yourself and developing a debt repayment strategy can also be an effective alternative to debt consolidation, in the right circumstances.  

By keeping a close and critical eye on your finances, prioritising debt repayments, and exploring methods such as the debt avalanche or debt snowballing, you can make significant progress in paying off your debts without the need to take on further debt. 

FAQs 

What is debt avalanche? 

Debt avalanche is a debt repayment strategy which is used by many people. It can be effective when used in the right circumstances. 

This is where you prioritise paying off debts with the highest interest rates first, while making the absolute minimum payments on other debts.  

By targeting high-interest debts, the strategy aims to minimise overall interest costs and accelerate the debt payoff process tenfold. 

What is debt snowball? 

Debt snowball is a debt repayment strategy that prioritises paying off debts with the smallest balances first while making minimum payments on any other debts.  

As each smaller debt is paid off in full, the freed-up funds are then applied to the next smallest debt in your roster.  

This approach provides psychological motivation by creating a sense of progress and accomplishment. This is because debts are eliminated one by one.