Can you get a debt consolidation loan with bad credit?
A debt consolidation loan may be available to some people with poor credit, but availability, price and terms can be more limited or less favourable than for someone with a stronger credit history. Consolidation does not remove debt; it replaces existing commitments with a new one. If a home is used as security, missed repayments can put it at risk.
General information about consolidation for homeowners is covered on debt consolidation loans, while adverse credit and second charge mortgages specifically are explained in second mortgages with bad credit. MoneyHelper and Citizens Advice offer free, independent debt advice before any borrowing decision.
How does debt consolidation work?
Debt consolidation means using one new credit agreement to repay two or more existing debts, leaving a new repayment schedule to maintain. The monthly payment may change because of rate, term and fees, while the total amount repaid can rise if repayment takes longer. Settlement figures and early repayment charges may also affect the calculation.
Before consolidating, it can help to compare settlement balances, any applicable APRC, the term, the monthly payment, the total amount repayable, fees, early repayment charges and whether the new borrowing would be secured or unsecured.
Could a secured consolidation loan increase the risk?
A secured consolidation loan places a charge over a property, which can make the consequences of missed repayments more serious than for unsecured debt. Lower monthly payments do not alone show that a loan costs less overall; a longer term can increase total interest. Existing unsecured debt can be converted into debt secured on a home.
The wider risks of secured borrowing, including repossession where repayments are not maintained, are covered in more detail in second mortgage risks.
What are alternatives to taking a consolidation loan?
Options can include speaking to existing creditors and obtaining free, independent debt advice, but the right option depends on income, debts, assets and priorities. This guide cannot decide whether a debt solution or new borrowing is appropriate. MoneyHelper and Citizens Advice can explain free debt-advice routes and the questions to ask.
Anyone with concerns about existing debt levels can contact MoneyHelper or Citizens Advice before considering further borrowing, since free, independent advice is available regardless of whether a consolidation loan is ultimately the right option.
Sources
- Debt consolidation loans (MoneyHelper)
- Debt solutions (Citizens Advice)
- MCOB 13: arrears and repossessions (Financial Conduct Authority)
- Consumer guidance (Financial Conduct Authority)
Frequently asked questions
Will a consolidation loan improve my credit score?
There is no guarantee that a consolidation loan will improve a credit score. Payment history on the new agreement, along with other factors already on a credit file, all play a part. Keeping up agreed repayments consistently is generally more relevant to a credit file than the act of consolidating itself.
Can I consolidate credit-card debt into a secured loan?
It is possible for unsecured credit-card debt to be included in a secured consolidation loan, but this converts unsecured debt into debt secured on a home. If secured repayments are not maintained, the home may be at risk, so this route carries a different level of risk than unsecured borrowing.
Does a lower monthly payment mean the loan costs less?
Not necessarily. A lower monthly payment can result from a longer repayment term, which can increase the total amount repaid even if the monthly cost falls. Comparing the total amount payable, fees, term and any early repayment charge gives a fuller picture than looking at the monthly payment alone.
Can I get free debt advice?
Yes. MoneyHelper and Citizens Advice both provide free, independent debt advice and information about the options available for managing existing debts. These services are independent of any lender or introducer and can help someone understand their position before deciding whether to take on further borrowing.