Is Debt Consolidation with Bad Credit Possible?

If you have multiple loans and are having trouble managing them, you can consolidate them into a single loan by taking out a debt consolidation loan. But what if you have a bad credit score? Can you get a debt consolidation loan despite your bad credit rating? In this post, we will try to answer these and many other questions you might have on your mind, related to debt consolidation.

Can you get a debt consolidation loan with bad credit?

Most borrowers with bad credit who want debt consolidation loans often think that their bad credit score might lead to refusal of the consolidation loans. However, while you are likely to face some problems in getting the loan at the best terms, many lenders might be willing to lend you money even if you have a bad credit score. Although they might also ask you for additional documentation, such as your income source, recent bank statements, and details of any assets in your name to confirm your ability to repay the debt.

Potential problems you might face getting a debt consolidation loan with bad credit

You might be relieved to know that you can get a debt consolidation loan even with bad credit, but you should expect to get it at less favourable terms than those with ‘good’ or ‘above average’ credit scores. For example, if lenders determine that you have a bad credit score, they might offer you a consolidated loan at a higher interest rate to account for the additional risk they are taking in lending you money.

Alternatively, some lenders might only offer you a secured loan – meaning they require you to provide collateral or security. However, this option can be risky as you might lose your asset if you don’t repay the loan. Interest rates on secured rates are generally lower than unsecured ones, but you should be aware that your collateral would be at risk if you don’t repay.

How to get a debt consolidation loan with bad credit?

Here are some tips to get a debt consolidation loan even with bad credit:

  • Shop around

You may need to shop around to find a debt consolidation loan for the most favourable loan term and interest rate. This can help you get the best deal, which will help you save plenty of money long term on interest. However, avoid applying for lots of loans when the lender makes a hard enquiry on your credit report, as this can negatively affect your credit score.

  • Keep your documents ready

You also need to keep your documents, such as bank statements and sources of income, ready so that lenders can analyse your profile and make decisions quickly. Some lenders are more concerned with your current ability to repay debts rather than your past history, so you can increase your chances of getting the loan if you have documentary proof that you have the means to make repayments of the consolidated loan comfortably.

  • Apply online

Nowadays, many lenders don’t have physical offices but operate online. So, if there aren’t many lenders in your area who offer debt consolidation loans, you can consider contacting online lenders. It is extremely easy to contact online lenders on their platforms and get your quote. All the documentation can be easily uploaded on their portals, and once your loan is sanctioned, it is deposited into your account electronically via bank transfer.

  • Find a co-signer

If you think that your credit score is not at par with the minimum criteria of most lenders, you can consider finding a co-signer, who can promise the lender about loan repayment in case you fail to repay it. However, the co-signer should have better credit than you – ideally, matching or exceeding the lender’s criteria.

The benefits of debt consolidation loans

Debt consolidation has numerous benefits for those who are overburdened with multiple debts.

  • Simplify repayments

With a debt consolidation loan, your loans with different maturities and terms are rolled into a single loan, which can drastically simplify repayments. It is easier to manage a single loan with single periodic repayments, in comparison to multiple loans with different repayments and due dates. Managing debt consolidation loans is also psychologically convenient as you have a set final date in sight on which your debt is supposed to be fully paid off. You can also reduce your stress as you have only a single loan to manage.

  • Can help improve your credit score

While taking a new debt consolidation loan may briefly hurt your credit score due to a hard enquiry by the creditor, you can gradually improve your credit score as you make loan repayments. Also, when you take a debt consolidation loan, you pay off your existing loans using the proceeds from the debt consolidation loan, which puts a positive impact on your credit score.

  • Reduce debt costs

Debt consolidation loans are taken not only to combine your debts into one but also to reduce your effective interest rate on the loan. Although taking a new loan involves fees, you can be better off in the long run if you can get it at a lower rate than your previous debts combined. This can save you plenty of money on interest costs over the loan term.

Final Thoughts

Debt consolidation is one of the many debt management strategies you can adopt. It can reduce your interest expense on the loan and make repayments easier to manage but you still have to be disciplined and make regular repayments. Merely getting a debt consolidation won’t fix your debt problems as you’ll have to follow budgeting and money management techniques to streamline your finances. Once you change your money habits and improve your credit behaviour, you can expect to have long-term financial stability.

B M Peachey

B M Peachey, has over 15 years of experience investing in property and the stock market, in both New Zealand and Australia. She has a post-graduate degree, with qualifications in Finance and Mortgage Broking and in Accounting and Bookkeeping. She is passionate about ensuring people have access to credible, reliable, and easy to understand information to help them get in control of the life they REALLY want to live.

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    Disclaimer: The information in this article is general in nature as it has been prepared without taking account of your specific objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.