What exactly is debt consolidation?
Debt consolidation is when you transfer all or a selection of your existing debt across multiple sources (credit cards, loans, store cards, etc) to a single loan.
Therefore those previous debts will be considered cleared or paid off by the original lender, and you’ll be left with one outstanding loan debt.
It’s a common option for those feeling overwhelmed by multiple debts and interest rates. It’s worth noting that it can be cheaper to consolidate debt, depending what APR you’re offered. On the other hand it can mean you’re paying back more, over a longer period of time.
How can I consolidate debt if I have bad credit?
A poor credit score can limit your lending options, but it doesn’t mean there are none. Plenty of lenders specialise in offering loans for bad credit. If you’re a homeowner, you also have the option of a secured loan (providing your equity exceeds the amount you want to borrow).
If you have a bad credit history and are likely to have a low score (here’s how to check your credit score for free). You can follow these three steps to see whether a debt consolidation loan could be for you:
Check your eligibilitySoft checking facilities for loans means you can check your eligibility without affecting your credit score. Check your eligibility for our loans.
Improve your credit scoreIt’s possible to start to improve your credit score in just 30 days. If you can make changes which will have a significant impact in a short space of time, it might be worth waiting till your score improves as you may get a better deal.
Apply for a bad credit loanIf your score can’t be improved in enough time, apply for a bad credit loan.
Do I need a secured or unsecured loan?
To be eligible for a secured loan, you need to have a mortgage with enough equity in it to offset the risk to the lender - this is generally your property. If you’re not a homeowner, you won’t be eligible for a secured loan, but a personal loan, which isn’t secured against anything you own will still be an option.
If you’re eligible for both, consider how much you need to borrow and look around to see which is the most sensible option for you. Often, secured loans can offer cheaper rates, but there is more at risk, so make sure you’re comfortable you’ll always be able to afford the repayments before going ahead.
Secured loans for bad credit
Because your property minimises the risk for the lender, you can often get better interest rates on secured loans even if you have a poor credit score. You’re also able to borrow more money and over a longer period of time (up to £100,000 over 25 years), and the presence of an asset also increases your likelihood of being accepted.
These reasons mean that they can be an attractive debt consolidation option. However, it’s important to remember that your home is at risk if you fail to keep up with your repayments.
Unsecured loans for bad credit
If you don’t own a home (or don’t want to secure a loan against your house) then an unsecured loan is the alternative. If you have a low credit score then this means you’re likely to pay a higher rate of interest.
At Ocean Finance, we arrange unsecured loans of up to £10,000 over 12 to 60 months. Unsecured loans are usually better suited for smaller amounts which can be paid back in a quicker time frame.
While your home won’t be at risk, there are other consequences, such as a default leading to County Court Judgements (CCJs) and potentially an attachment of earnings order.
Will debt consolidation improve my credit score?
Any credit application, whether accepted or rejected, can temporarily impact your score. This is because all applications show on your file, and lenders may interpret multiple applications as signs of financial instability.
Mid to long term though, it may lead to an improvement. If you regularly make your repayments on time, every time and in full then your score will gradually improve, as this will reduce your total debt and positively improve your credit history. By the same measure, failure to keep up with repayments can impact your score and lead to more severe consequences.
What if I can’t repay the loan?
If you can no longer repay the loan, it’s important that you act quickly before the account goes into default, which can happen after 3-6 missed payments. Any default will stay on your credit file for 6 years. Communicating with your lender is your first port of call, as you may be able to negotiate a payment holiday which gives you time to get your finances straight.
Reduced payments and freezing the interest are also options that you may be offered whilst you are getting your payments back on track. You can also get free and independent advice from debt charities such as StepChange, Citizens Advice, and the Debt Advice Foundation, who can help you get out of bad debt situations before or once they’ve happened.
I’ve been rejected for a consolidation loan because of my credit score
This can happen even with specialist lenders for people with bad credit, as lender’s requirements vary. Just because you’ve been rejected from one, doesn’t mean you will be from all. Use eligibility tools (soft searches) to determine what you’re likely to be approved for, without affecting your credit score, then you can make minimal applications.
Do I have any other options?
There are other options out there beyond loans to consolidate your debts. The most common is a credit card which can allow you to transfer over existing debts, although the limit for people with bad credit rarely goes above £2500. As such, they’re usually better suited for smaller purchases that can be paid off quickly.
Another source of finance is an overdraft, although these also can come with high interest rates. They are also usually suited for small amounts over shorter periods of time.
You may also find you may be eligible for money borrowed via a credit union, which offers finance for people based shared traits. These can include sharing the same occupation (the NHS have one) or living in the same area. Also, if you are on a form of benefits, you may be eligible for an interest free budgeting loan.
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Intelligent Lending Ltd is a credit broker working with a panel of lenders.