How to Consolidate Bad Credit Debt

Should I consolidate my bad credit debt

If you are concerned about bad credit and spiralling debt, you have come to the right place. This article sets out everything you need to know to understand bad credit debt consolidation and whether this might be the right option for your circumstances.

Bad Credit Debt Consolidation Explained

As the name suggests, debt consolidation essentially brings all of your debts together (‘consolidating’) and managing them as one. Typically the process of debt consolidation means taking out a single loan and using this loan to pay off all of your other smaller debts. So, for example, you can use a debt consolidation loan to pay off credit cards, loans and purchases on finance.

Bad credit debt consolidation might be an option for you where you have difficulty making repayments on your debts and have a poor credit rating.

Am I Eligible for Bad Credit Debt Consolidation?

You will need to borrow a significant amount of money to consolidate your debts, which may seem impossible where you have a poor credit rating.

However, although large loans are not usually available to those with a poor credit rating, this is not the case with debt consolidation loans.

You will be using the loan to repay debt, which means that you will not add to your existing debt level. Lenders are normally understanding and sympathetic to the idea of taking a debt consolidation loan for this purpose.

How Does Taking a Debt Consolidation Loan Work?

Where you are struggling to pay debts and manage your money, debt consolidation can be a lifeline. In addition, where you are facing additional difficulties resulting from an adverse credit rating, debt consolidation can help you in the long term reduce the cost of your debts.

You will make just one payment each month to your consolidation loan provider rather than paying multiple lenders. This can make your debt easier to manage and keep track of – which can mean fewer missed payments.

You can use the loan to pay off payday loans, store cards, credit cards and even bad credit payday loans. A bad credit debt consolidation loan can almost immediately provide relief and make your financial difficulties feel manageable. You can regain control of your spending and have room to breathe.

You will make just one payment each month to your consolidation loan provider

Can I Save Money With Bad Credit Debt Consolidation?

Working out whether a bad credit debt consolidation might help you to save money in the long term can seem complicated. You may be making repayments over a longer period of time, but the payments may be more manageable, resulting in fewer missed payments and associated charges. However, you may be lengthening the amount of time you are in debt for.

When you take out a bad credit debt consolidation loan, you will be making an agreed monthly payment for the entire term of the loan. Where all of your other debts may have been due to be paid off at different times when you opt for debt consolidation, they are all bundled together.

When considering a bad credit debt consolidation loan, you must analyse the impact such a loan might have on your financial situation. For example, you may be offered an interest rate on your consolidation that is more favourable than the interest on your other debts. As a result, you will pay back less than if you were to keep paying your debts individually – even over a shorter term.

Unfortunately, for many people paying back debts over a longer period of time will not be the right answer, so you must fully understand the impact of taking such a loan and consider your decision carefully.

Understand the impact of taking such a loan

When Is Taking Out a Bad Credit Debt Consolidation Loan Not the Right Answer?

When thinking about taking out this kind of loan, the first thing to consider is when the payments on your existing debts are due to end. If you choose to keep paying off your debts as they are, each debt you clear will result in a reduction to your monthly outgoings.

Let’s use an example to demonstrate. Say you have 4 debt repayments to make each month, with the total amounting to £420 per month. Debt consolidation might reduce your monthly payments to £300 per month. The lower payment may be more manageable for you and give you a sense of relief around your monthly outgoings. However, when we look at the makeup of your debts, perhaps they were two credit card repayments of £100 each, one store card payment of £50 and one loan repayment of £170. If you were due to pay off your loan in the coming months, your overall payments would reduce to £250 anyway, without a debt consolidation loan. The result is that the debt would be cheaper than taking out a debt consolidation loan. In this time, your credit card balances may have also reduced, making your monthly payments even cheaper.

We understand that struggling to make debt repayments can feel all-consuming, and the option to make a lower monthly repayment can be very attractive. However, it would be best to try to persevere where there are only a few months left to reap the rewards of lower payments in the long term.

While debt consolidation allows you to budget better and plan effectively, it may not always be the best financial decision.

When Might a Bad Credit Debt Consolidation Loan Be the Best Option?

There are many circumstances where debt consolidation could be the answer to your financial difficulties. For example, debt consolidation can be beneficial where you have a poor credit score, have gone over your credit limit or miss payments regularly. If you are having financial difficulties, you may understand that even being in your overdraft long-term can be very expensive.

You may be paying out a lot of money to cover bank charges, default fees, interest and more. Consolidating your debt might be a good option to avoid these fees and get your debt under control.

Typically, where these conditions apply, debt consolidation is significantly cheaper than continuing to struggle with multiple debt repayments for months, or in some cases, years.

Another reason you may wish to consolidate is where you are really struggling with your debts. Although taking out a debt consolidation loan is a big commitment, it can be the first step to finally being free of your financial hardship.

What Is the Difference Between Secured and Unsecured Bad Credit Debt Consolidation?

Debt consolidation loans, like most loans, can be secured or unsecured. When you take out a secured loan, there are additional risks. For example, most secured loans are secured against your home, and where you do not keep up with repayments, your lender may take action against you, and you could lose your home in the proceedings.

However, because of the risk of this action being taken, you are more likely to be approved for a secured loan. Most people fear losing their homes, and as a result, are more likely to make a greater effort to keep up with repayments. Also, where the lender cannot get their money back from repayment, they have the power to repossess your property to recover the amount owed.

Normally, secured loans are suitable for large sums of money. For example, with a secured loan, you may be able to borrow up to £500,0000. However, it would be best if you considered taking out any secured loan carefully as your circumstances, and in turn, your ability to repay the loan could change at any time.

Can I Take Out a Bad Credit Debt Consolidation Loan If I Have a Bad Credit Score As a Result of Debt Management Issues?

Yes, but you should be extra cautious. First, it is important to consider whether you will keep up with your repayments, no matter what happens. If you are concerned, an unsecured loan might be a better option. Unsecured loans are safer because they are not secured against your property. However, they have a lower acceptance rate as it is riskier for the lender. You may also not be able to borrow as much money with an unsecured loan. On the other hand, if you need to borrow a large amount to consolidate your debts, a secured loan may be your best option.

Why You Need to Be Cautious After Consolidating Your Debt

Debt consolidation can feel freeing. You only have one repayment to focus on, and the end of your debt worries are in sight. However, for many, debt consolidation poses the risk of creating an even greater debt problem.

If you are looking to take out a bad credit loan for debt consolidation, you must be confident that you have the willpower to close all of your accounts after you have paid off what you owe the creditors. If you leave the accounts open, you might be tempted to spend, and you will end up in an even worse debt situation than before you consolidated your debt.

It is crucial to be strict with yourself and to be committed to getting out of debt. It isn’t easy, but debt consolidation can help so long as you can avoid spending. With debt consolidation, you can reap the benefits of reduced payments and better debt management, but these are wasted if you fail to close your other accounts and get into more debt.

What Are the Alternatives to Bad Credit Debt Consolidation?

Where your situation is not serious enough to warrant bankruptcy or an IVA, you may wish to consider a Debt Management Plan.

A Debt Management Plan allows you to make smaller monthly repayments to your creditors based on an amount you can afford. In addition, as a gesture of goodwill, your creditors will not charge interest on the debt owed.

You will manage a Debt Management Plan on your own. The idea is to create a realistic budget for your household and then contact your creditors to discuss how much you can afford to pay. It is important to note that your creditors do not need to accept your proposal, but they need to consider it and be fair in their decision.

You can also get help with a Debt Management Plan. Charities such as StepChange offer a free debt management service. This may be more suitable where you feel you will not stick to your plan alone. Many charities offer this service completely free of charge, including StepChange.

A Debt Management Plan may be a cheaper option for you where your creditors

You will make one single payment to the debt management charity, and they will then negotiate with your creditors and pay them on your behalf. This is convenient, as it is like having all of your debts in one place, and repayments are likely to be lower than they were previously.

A Debt Management Plan may be a cheaper option for you where your creditors agree to stop charging interest or drop any charges associated with the debt. Your creditors may also put a hold on your account, prevent you from taking more credit and put a block on your existing credit cards. However, if your creditors do not stop the interest on your account balance, your debt may last longer, and it will be more expensive in the long run.

How Does Debt Consolidation Affect My Credit Score?

If you already have a poor credit score, we understand that you may be concerned about doing anything that might cause further damage.

However, debt consolidation can actually improve your credit score. When you take out a single loan to pay off your debts in full, your cleared accounts will be recorded as ‘paid in full’ or ‘closed’ on your credit report. Where you take steps to consolidate your debts before any missed payments, you can successfully prevent a default from being registered on your report. However, you will not benefit from this under a Debt Management Plan. You can still default, which will stay on your credit file for 6 years. Your credit score will not matter if you have no plans to borrow any more money in the next 6 years.