How to get a debt consolidation loan if you have bad credit

Borrowers with poor credit who want to consolidate debt have the most difficulty getting a loan that suits their needs. However, there are options available for those with bad credit scores – you just need to know where to look.

Rachel Lacey Last updated on 26 March 2021.
How to get a debt consolidation loan if you have bad credit

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A debt consolidation loan can make your debts easier to manage, but what if you have a poor credit record?

If you have a number of different debts – like credit cards, overdrafts and loans – consolidating them into one loan can make life easier. In addition to only having one repayment each month, you could cut the cost of your borrowing and thereby lower the cost of your monthly outgoings. However, borrowers must consider, if you extend the term of your borrowing, the loan is likely to cost you more in the long term.

Before a lender approves a loan, it will run a credit check to find out whether you’ve previously had problems with debt repayments. This means that the best deals will be reserved for borrowers with the best credit records, while those borrowers with patchy or bad credit records may have to pay higher rates of interest or not qualify at all.

This can seem a bit ironic – those borrowers with the greatest desire to consolidate their loans and get back in control of their finances may be the ones that find it hardest to do so. But, just because you have got bad credit doesn’t necessarily mean you can’t get a debt consolidation loan.

» MORE: A debt consolidation guide

Check your credit record

Before you start shopping around for a loan, it’s always worth checking your credit rating with each of the three main credit reference agencies used by lenders in the UK: Experian, Equifax and TransUnion. Each must provide you with a copy of your credit report free of charge – you can check online or request a hard copy.

If you spot any mistakes in your credit report, it’s important to contact the credit reference agency to get them removed, or if there are any issues you feel need to be explained to lenders, it is possible to add a brief ‘notice of correction’.

There may be other steps you can take to improve your credit record as well, such as ensuring your name is on the electoral roll.

The better your credit score, the more you will be able to borrow at lower rates on an increased number of deals.

» MORE: Tips for improving your credit

Finding the best debt consolidation loan for bad credit

Many unsecured loans, also known as personal loans, can be used for debt consolidation.

However, if your credit record is patchy or poor you may need to consider a specific debt consolidation loan. Some lenders will be more amenable than others to borrowers that do not have the best credit scores.

Alternatively, if you are a homeowner, you may find it easier to get a secured loan. As the lender can stake a claim on your home if you can’t meet repayments, the eligibility criteria is assessed differently. The more equity you have in your property, the more you could potentially be able to borrow.

You can compare unsecured and secured loans on NerdWallet.

A free eligibility checker, which runs a ‘soft search’ credit check without lowering your score, lets you find out which deals you are likely to be approved for before you apply. This is in contrast to ‘hard’ searches used by lenders when you formally apply for a loan, which leave a mark on your credit record. If a new lender sees too many applications for credit in a short period of time it may not approve your application.

The interest rate is likely to be your priority when you are shopping around for a debt consolidation loan. The lower the rate, the less the loan will cost you overall. However, when you are looking at secured loans, which are more likely to charge fees, it is also important to look at the APRC - the annual percentage rate of charge. This is a percentage figure that factors in all the fees and charges as well the interest rate to give you a better, and in some ways truer, indication of the cost of the loan.

It is also important to be aware of any charges that may apply if you want to repay the debt early.

» MORE: Secured vs unsecured debt consolidation loan

Is a debt consolidation loan right for me?

Although a debt consolidation loan may make your debts easier to manage, they aren’t right for everyone.

Once the loan is set up, it’s important to try not to borrow any more money or use your credit cards, which could exacerbate your problems.

Similarly, it’s essential you keep repayments up. Missed or late payments will worsen your credit record, making further borrowing harder, and in the case of secured loans, could put your home at risk.

For this reason, if you have bad credit, it may be worth seeking free specialist advice from a debt advice charity first. It can help you work out whether a debt consolidation loan is the right approach for you and offer advice on alternative solutions, such as arranging a new repayment plan with your creditors on your behalf.

» MORE: How debt charities can help

Image source: Getty Images

About the author:

Rachel Lacey is freelance journalist with 20 years experience. She specialises in personal finance and retirement planning and is passionate about simplifying money matters for all. Read more

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