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Cut monthly repayments with a debt consolidation loan for bad credit

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Last updated
March 21st, 2024

What is a debt consolidation loan for bad credit?

A bad credit debt consolidation loan works in the same way as a standard debt consolidation loan but is easier to apply for.

With a consolidation loan, you roll-up all your existing debts into one new loan. This means you only have one monthly payment to worry about. And providing the consolidation loan rate is lower than on the debts you're transferring, you should save money. 

Can I get a loan if I have bad credit?

Some consolidation loan providers are willing to lend to people who have had problems with credit in the past. Unfortunately, because lenders tend to view people with a bad credit score as a greater risk, they can charge them higher interest rates and may limit how much they can borrow.

Types of bad credit debt consolidation loans

Secured debt consolidation loans

This type of debt consolidation requires you to have equity in one or more properties, as the loan will be secured against it.

Secured debt consolidation loans offer two main advantages over non-secured loans: you should be able to borrow a much larger amount and secure a lower interest rate.

On the other hand, you could lose your home if you’re unable to keep up with repayments and default on the loan.


Unsecured debt consolidation loans

This type of loan doesn’t require you to be a homeowner. Your ability to repay the loan and your credit history are the two principal factors that determine whether you are accepted for an unsecured debt consolidation loan.

This means that you may struggle to be approved for these loans if you have a poor credit score. If you do qualify, you may not be able to borrow as much as others and you may be stuck with a higher interest rate.


Types of bad credit debt consolidation loans

Secured debt consolidation loans

This type of debt consolidation requires you to have equity in one or more properties, as the loan will be secured against it.

Secured debt consolidation loans offer two main advantages over non-secured loans: you should be able to borrow a much larger amount and secure a lower interest rate.

On the other hand, you could lose your home if you’re unable to keep up with repayments and default on the loan.


Unsecured debt consolidation loans

This type of loan doesn’t require you to be a homeowner. Your ability to repay the loan and your credit history are the two principal factors that determine whether you are accepted for an unsecured debt consolidation loan.

This means that you may struggle to be approved for these loans if you have a poor credit score. If you do qualify, you may not be able to borrow as much as others and you may be stuck with a higher interest rate.


How to choose a best debt consolidation loan with bad credit

Here are some things to consider before applying for a loan:

Calculate how much you owe

Calculate the total of those current debts. You can usually combine debts from existing credit cards, overdrafts and loans into a single bad credit consolidation loan.

Determine what you can afford to pay each month

Draw up a budget to determine how much you can afford to contribute to paying off the loan.

Compare rates for loans that fit your criteria

Look for the lowest rate possible, with monthly repayments that you can afford.

Pros and cons

Pros

Simplify repayments into a single payment
Can reduce the amount of interest you pay
Monthly payments may be more affordable

Cons

Can take longer to pay off debt
You may pay more in interest overall
You may have to pay additional fees

What should I consider when consolidating debt?

Will it save money?

Possibly. It can be a good idea to get a single loan to pay off all your debts, but only if you can afford the repayments, the amount of interest you pay is lower overall and you're not locked into making repayments over a much longer term.

It's important to get the balance right. If the only reason the monthly payments are more affordable is that the debt is spread over a longer period, then you will actually pay more in interest overall, meaning that you have to spend more to borrow the same amount.

The good news is that a bad credit history won’t necessarily affect your eligibility for a debt consolidation loan. So it can be a good way to help you manage your money provided the loan meets the criteria mentioned above.

Will it affect a credit report?

It will, but that doesn't mean it will have a negative effect. Lenders are likely to be much happier seeing a debt consolidation loan on your credit report than late payments on a raft of debts.

The fact that you have been proactive about consolidating debts shows that you are taking responsible steps towards managing your finances and reducing the amount of debt you have.

What's more, if you take out a debt consolidation loan and then stay on top of your repayments, your credit score will improve as a result.

The key is to stay on target, avoid missing any payments and not take on extra debts that you can't afford.

It can be a good idea to get a single loan to pay off all your debts, but only if you can afford the repayments."

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Can you get a bad credit debt consolidation loan without a guarantor?

Although it's possible to get a bad credit debt consolidation loan without a guarantor, lenders are more likely to look favourably on your application if you have one. This is because it reduces the risk they take in lending to you.

A guarantor is usually a relative or close friend who is financially secure – which typically means they have their own home – and is willing to accept responsibility for making repayments on your loan if you fail to do so.

Alternatives to debt consolidation loans for bad credit

Consolidation loans for bad credit are sometimes a good option. But there are alternatives if a bad credit consolidation loan won’t work for you or if you can’t get accepted for one.

0% balance transfer credit card

You could think about getting a 0% balance transfer credit card. You could still consolidate your debts, and it’d give you around 6-12 months interest-free.

Second charge mortgage

Although this would put the equity in your home at risk, if you’re a homeowner, a secured loan could be another alternative to a debt consolidation loan.

What can I do if I’m struggling with debt?

If you're struggling with debt, there are several steps you can take.

Firstly, get an understanding of the full extent of your debts by gathering statements and bills from all creditors. Track your income and expenses to identify areas where you can cut back and allocate more funds towards debt repayment.

If you're still struggling, reach out to your creditors to explain your situation. They may offer repayment plans or temporary relief options. There are also various debt charities such as StepChange, National Debtline and Citizen's Advice. that you can speak to for support. They might be able to help you devise a debt management plan.

Depending on your circumstances, you may be eligible for government schemes or benefits to help manage debt. And most importantly, resist the temptation to take on more debt to cover existing obligations. Instead, focus on reducing your current debt burden.

Despite bad credit, a debt consolidation loan can be a financial lifeline. It can provide a structured path out of debt by combining various debits into one affordable payment. While it can be more expensive in the long run, it can help simplify your finances and rebuild creditworthiness over time.

FAQs

Do I have to pay off all my debts with the loan?

No, you don't have to pay off all your debts with a loan as you can choose which debts to pay off. However, if you keep any open you have to show you can afford to pay them back alongside any new loan.

Will the money be paid straight to my other lenders?

No, the money won't be paid straight to the other lenders as it is usually paid to you and then you need to pay off each of your debts separately.

How much can I borrow with a bad credit loan?

In terms of how much you can borrow with a bad credit loan, it depends on the type of loan you choose and the lender. For example, you could borrow more than £100,000 with a secured loan.

What happens if I cannot make my repayments?

If you cannot make the repayments, you may be charged a fee and your credit record could be damaged.

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About the author

Lucinda O'Brien
Lucinda O'Brien has spent the past 10 years writing and editing content for regional and national titles. She applies her industry knowledge to ensure readers can make confident financial decisions.

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