What is bad credit debt consolidation? Debt consolidation is the act of bringing all of your debts together so that they can be managed as one. Bad credit refers to the status of an individuals credit profile and refers to a lower than average credit score.
The process of debt consolidation involves taking out one larger loan and paying off all a group of smaller debts. You can Typically you would use the loan to clear other forms of personal credit such as; credit cards, unsecured loans, overdrafts and any form of purchase finance.
Debt consolidation is not the same as debt management.
If you are struggling to make repayments and manage your debt comfortably, you might choose to go down the bad credit debt consolidation route, especially if you have a poor credit rating.
How to get bad credit debt consolidation
To consolidate your debts, you will need to borrow a larger amount of money – enough to pay off your smaller credit obligations.
This might seem like it is out of the question if you have a poor credit rating.
Whilst it is true that large loans are usually not available to people with adverse credit, the situation is different with debt consolidation.
Since you are using one debt to repay your others, lenders will understand that you are taking this loan with a very specific purpose. So, you will not be adding a lot to your existing level of debt.
The practicalities of bad credit debt consolidation
If you are struggling to manage your money, debt consolidation can help. This is even more so if you have bad credit and need a longer term loan to help you reduce your finance costs.
Instead of making payments to a variety of creditors, you can make just one payment each month.
It is significantly easier to keep track of your debt when it is all held in one place.
Debt consolidation can make your financial commitments almost immediately more manageable. If you have overstretched your budget, you can use this to regain control.
Saving money with debt consolidation
For example, you could be extending the amount of time that you are in debt for.
During the full term of your debt consolidation loan, you will be making regular, agreed monthly repayment.
Previously your debts are likely to have been paid off at different times with different rates of interest for each. With debt consolidation, they will all be bundled together on rate of interest and paid off at the same time.
It is important to consider the impact of debt consolidation. It may be beneficial if you are offered an interest rate on your new loan that is lower than the interest that you pay overall on your current debts. However, if your loan term is much longer than the current debt obligations you manage it could be that you pay more back over the long term, which for many people, may not be the right answer.
To save money with debt consolidation, you should contact the provider for each credit obligation you have and see how much it will cost you to repay each debt early. You should then calculate the entire amount you will pay back for each small debt you have without paying them back early. This will give you the amount of interest you have to repay.
If you then take the amount it will cost to repay all your smaller debts off early and research how much it will cost to take a loan out for the full amount – you can compare the cost of the loan against the cost of your smaller loans and see if you would save money by consolidating.
When debt consolidation might not help
Whilst you may reduce your monthly repayments at the start, you should think carefully about when your other debts are due to end.
Without debt consolidation, each cleared debt would have reduced your monthly outgoings.
For example, you might have been paying £370 per month on debt repayments before consolidation. Debt consolidation might bring your monthly repayments to £250 per month. Which would be more manageable but likely to increase the length of time that you are in debt for.
The £370 may have been made of a £70 credit card payment and two £150 loan repayments. If one loan was due to end in the following six months, then your overall repayments would have reduced to £220. This would make ongoing payments cheaper than with debt consolidation.
You might also have reduced your credit card balance, making those repayments lower.
When weighing up your options, consider whether you can fight through the next few months for the reward of reduced payments in the near future.
Debt consolidation brings predictability, ease of monitoring and near-immediate results. But it may not be beneficial long term.
When debt consolidation might help
Consolidating your debts can help if you have bad credit and are regularly missing repayments, or have gone over your credit limit.
Even being in your overdraft can quickly become very expensive.
If you are paying a small fortune in charges and default fees each month, then consolidating your debt is one of the most effective ways to remove these costly expenses.
In these situations, consolidating works out significantly cheaper. More so than struggling with your debt for months or years.
Consolidation is also suited to people that are really struggling with their current repayments. Only if they feel happy to take on the extra commitment if it helps to make their budget more manageable.
Secured and unsecured debt consolidation
Bad credit debt consolidation can come in both secured and unsecured forms.
There are additional risks associated with secured loans. Most are secured against your home. You risk losing your home if you cannot keep up with repayments.
You are more likely to be approved for a secured loan because the lender has the option to repossess your assets to recover their money if necessary.
Many secured debt consolidation loans are also for larger amounts of money than their unsecured counterparts. You may be able to borrow as much as £500,000.
It is wise to be very cautious if considering a secured loan. Circumstances can change at any time.
What if you have adverse credit because of previous debt management problems? Then, you should take extra time to consider if you are able to keep up with your commitments.
Unsecured loans are the safer option. They are not secured against your property but come with a lower chance of acceptance as a result.
You may not be able to borrow as much money if your loan is unsecured.
Caution after debt consolidation
One of the biggest risks with debt consolidation is that it can encourage more debt.
You need to be disciplined enough to close all other lines of credit, once you have paid what you owe. Otherwise, you will be left with credit cards that you can turn to again.
If you are not strict with yourself, then you could end up struggling even more after debt consolidation. The benefits of debt consolidation – reduced payments and easier debt management – are wasted if you then get into more debt.
Alternatives to debt consolidation
A DMP allows you to make smaller monthly repayments, at an amount that you can afford, to your existing creditors. You will be repaying your debt for longer, but some creditors will stop charging interest as an act of goodwill.
You can manage a DMP on your own. Create a fair and realistic household budget, then contact your creditors and ask them to work with you. They do not need to accept your request but must be fair in their consideration.
A Debt Management Plan that is managed by someone else can act more like debt consolidation and may be more suitable if you have bad credit. Charities like StepChange offer this service free of charge.
You will make one monthly payment to a debt management charity. They will negotiate with your creditors and pay them on your behalf. From your perspective, this is like having all of your debts in one place, with lower monthly repayments than previously.
Debt Management Plans can work out significantly cheaper if your creditors reduce their charges or put a hold on your account. They can also stop you from taking out more credit or using your existing credit cards.
If creditors do not stop charging interest, your debt will last for longer and will become more expensive overall.
Debt consolidation and your credit score
If you already have bad credit, you might be concerned about your score decreasing further.
One of the benefits of bad credit debt consolidation is that it may help to improve your credit score.
You use the new loan to repay existing ones in full. Your successfully cleared debts will be recorded as ‘closed’ or ‘paid in full’ accounts.
If you act to consolidate your debts before you have missed payments, you can avoid defaults being marked on your credit file.
A Debt Management Plan, the main alternative to debt consolidation, does not offer this benefit. Instead, you will be missing repayments and can receive defaults that stay on your credit file for six years.
If you already have very poor credit, you may decide that you are willing to continue for an additional six years before taking steps to improve it. Your credit rating will not matter much if you do not intend to borrow any more money.
Having a large debt consolidation loan is also likely to impact your chance to borrow more money. However, you should be able to recover your credit score as soon as your debts are fully cleared.
An opportunity to improve your credit score could be important if you plan to borrow in future. You may decide to borrow in future for a mortgage or to buy a car on finance.