Is a debt consolidation loan the answer to bad credit?
Are you struggling to keep on top of your repayments?
Perhaps you have a number of credit cards or loans with different balances and rates.
If you do, it can be difficult to keep track of what you owe.
Plus, if you’ve come close to missing any payments because you’re juggling various payment dates, your credit history will have been at risk of damage. This is something you’ll want to avoid.
A debt consolidation loan may be the solution to simplifying your finances before your credit history starts to suffer. But, if you already have a bad credit history, you might not be eligible to borrow more.
How can a debt consolidation loan help?
With a consolidation loan, typically you’ll work out what the combined balance is of your current unsecured borrowing (like credit cards, store cards, overdrafts and personal loans) and apply for a loan of this amount. You then use this money to pay off these debts, and replace multiple monthly repayments with just one.
Just bear in mind that there’s no guarantee the loan will be a cheaper way of clearing your debts. To make your monthly payments more affordable, it might be the case that you’ll make repayments for longer and pay more interest overall than you would have on your original agreements.
If you’re a homeowner, you’ll have to weigh up whether a secured or an unsecured loan is the better option for you. The type of loan you opt for will also depend on the overall balance of your debts, and your credit history.
If you’ve been unreliable when borrowing in the past (making payments late or missing them altogether), this is likely to affect your ability to borrow in the future. And some loan providers might be put off lending to you. As a result, you could struggle to get a debt consolidation loan.
However, bad credit doesn’t always mean you’ll be turned away. Some lenders, like us at Ocean, specialise in lending to people with bad credit.
But because you present a greater risk, you might be offered a higher interest rate. This is why it’s important to weigh up your options to find a loan that suits you.
Will my credit history improve?
By repaying what you owe on time each month, your credit history will gradually improve.
If your finances are simpler and you no longer have to juggle several different lenders, rates and dates, this can help reduce the chances of you missing a payment.
When you miss a payment, the credit reference agencies - Experian, Equifax and Callcredit – are informed and your credit history is marked. This footprint will be visible to you and any lenders who look at your credit history.
Although a debt consolidation loan might cost you more in the long-run, if you’re worried about losing track of your current payments and damaging your credit history, it might be worth considering. You may be able to simplify your finances and give your credit history the boost it needs.
When you apply
You should bear in mind that each time you apply for credit, it leaves a footprint on your credit history. If lenders can see that you’ve applied to a number of other lenders in a short space of time, they might get the impression you’re desperate to get your hands on more cash. This is likely to put them off lending to you.
With this in mind, if you feel that a consolidation loan is the best option for you, it’s a good idea to use a soft search tool first to check your eligibility before you apply. Find out more about how to do this here.
Before you apply, it’s vital you work out whether the monthly repayments will be affordable. Remember, if you fail to repay your debt consolidation loan on time, this will cause problems for your credit history.
Disclaimer: All information and links are correct at the time of publishing.