How to consolidate debt with bad credit

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Everybody has to start somewhere when it comes to building a healthy credit profile. If you’ve had a few bumps in the road, don’t worry. There are plenty of ways you can get back on track and start to improve your credit score.

In this guide, we’ll talk through the basics of debt consolidation and the key things to consider if you’re currently going through a period of bad credit.

What is a debt consolidation loan?

A debt consolidation loan is a loan from a single lender that you use to pay off multiple existing debts. This leaves you with just one monthly repayment to stay on top of.

If you’ve recently had a change of circumstances, or have been having trouble keeping on top of multiple repayments for credit cards, loans or overdrafts, then a debt consolidation loan may help.

Some ways that debt consolidation can help:

  • Simplify your finances by rolling multiple monthly repayments into one
  • Spread costs out over a longer term so that you’re paying less each month
  • Fixed repayments each month over a set repayment term

Does consolidating debt affect your credit score?

If you consistently make repayments on-time and do not take on additional debts, then debt consolidation can help to improve your credit score over time as your debt is repaid.

As a debt consolidation loan application will often involve a ‘hard search’ on your credit report, you may see an initial temporary dip in your credit score. As you start to pay off the debt each month, you should then see your credit score begin to improve.

How can debt consolidation help to improve a bad credit score?

If you are currently going through a period of lower credit, then debt consolidation may be an option worth considering.

To improve your credit score, you will need to repay any money you have borrowed from lenders. This might be through credit cards, personal loans, overdrafts or other forms of borrowing.

A debt consolidation loan will therefore help with bad credit by making it easier for you to stay on top of repayments. This is particularly helpful if you have regular repayments to multiple lenders and are finding it hard to keep track of them all.

It’s important to note that, just like any credit repayment, missing a debt consolidation loan repayment can have a negative effect on your credit score.

Is debt consolidation a good idea if you have bad credit?

Whether or not debt consolidation is right for you will vary depending on your circumstances and preferences.

Broadly speaking, debt consolidation is only worth considering if the following points apply to your circumstances:

  • You can afford the monthly payments until the debt consolidation loan is repaid
  • Any savings you would make through the process aren’t negated by fees or charges

Debt consolidation is also worth considering if:

  • At the end of your term, you will have paid less interest than you were paying before and the total amount payable is less
  • You want to reduce your monthly repayments by spreading your current debts out over a longer term

If you are thinking of consolidating existing borrowing you should be aware that you may be extending the term of the debt and increasing the total amount you repay.

For further guidance, you can refer to Money Helper, a government-backed financial advice service.

Can you get a debt consolidation loan with bad credit?

Even if you’re going through a difficult patch and your credit score has taken a hit, you may still be able to take out a debt consolidation loan. At Freedom Finance, we offer two types of loans that are suitable for debt consolidation with a low credit score.

Secured homeowner loans

A homeowner loan is a secured loan against your property and allows the borrowing of larger sums spread over a longer period of time.

The increased security for the lender means that you’re more likely to be eligible even with bad credit history. There’s more scope for longer repayment terms of up to 30 years and lower interest, meaning smaller monthly payments may be possible too.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

Guarantor loans

A guarantor loan is a loan that is taken out with someone else, such as a friend or family member, who is then required to repay the debt if you are unable to. It functions in a similar way to a personal loan, with an extra layer of security for the lender that allows for applicants with lower credit ratings.

A guarantor will need to meet the following criteria in order to be eligible:

  • Over the age of 21
  • Has a UK bank account
  • Has a good credit score
  • Is financially independent from you

Keep in mind that your guarantor will have to cover the cost if you fail to pay back your loan. If they are unable to, it may have a negative impact on their own credit score and they can risk being taken to court.

How to get a debt consolidation loan with bad credit

While the products available to you if you have a low credit rating are fewer, the process for consolidating your debt is largely the same.

1) Calculate how much you owe

The first step is to review all of your debts and total how much you would require in order to pay each of them off in full. Be mindful of any early repayment charges, or interest that may be added. It may be helpful to contact the provider of the credit and ask them what it would cost to repay the debt in full within a specific timeframe. 

2) Select your product and apply to borrow that amount

Once you know how much you need to borrow, the next step will be to determine which product is right for you.

If you’re looking for a secured loan, a qualified loan adviser can give you advice on the best secured loan option for you.

3) Pay off your existing debts

Once the debt consolidation loan funds have been paid into your account by the lender, contact the providers with which you have debt and take any necessary steps to pay off the amount owed in full. Once repaid, ensure that the account has been closed.

4) Repay the debt in monthly installments

With the weight of your former debts now lifted, you now just have to focus on one monthly repayment to start rebuilding your credit score. A good practice is to set up a budget and transfer the monthly repayment shortly after your payday, or any other recurring monthly income.

Looking to consolidate your debts?

Take control of your finances and learn how Freedom Finance can help.

Explore our secured debt consolidation loan options