If you know your credit score is below average and you want to consolidate your debts, you should consider looking for bad credit debt consolidation loans. There are some lenders out there that will still offer debt consolidation loans to people with a poor credit rating.
This guide covers all bases and lists some of your options when searching for debt consolidation loans for bad credit in the UK. Let’s get cracking!
What is debt consolidation?
Debt consolidation is a method used to reduce your number of creditors and save money in the process. It is used by people who are struggling with their finances and tiptoeing towards arrears, and it is used by people who just want to save some money on their monthly repayments.
How does debt consolidation work?
Debt consolidation works by taking out new credit, such as a personal loan, and then using the money to pay off multiple existing debts, if not all of them. You can use the money from the loan to pay off personal loans, credit card debt, store cards and much more. Thus, you switch from having many monthly repayments payable to different lenders to just one monthly payment to keep track of, making it easier to manage your money.
Although streamlining your debts is beneficial, debt consolidation is only worthwhile if you can save money at the same time. This is achieved by getting a loan with a lower interest rate than the interest payments on existing debts.
It’s important to realise that these loans don’t solve any underlying reasons why your debts may have gotten out of control. You must keep up with the new loan repayments to avoid further issues.
What is a debt consolidation loan?
A debt consolidation loan is a type of loan used to consolidate debts by putting all the money you owe together. An unsecured debt consolidation loan should only be used to pay off your current credit, and not for other purposes.
Some personal loans without a specific use can also function as debt consolidation loans, but it’s best to check with the lender that this is allowed before applying. One lender may have different rules from another.
You should only ever apply for a debt consolidation loan with a lender that is authorised and regulated by the Financial Conduct Authority (FCA). You’ll need to be a UK resident to apply and over a certain age, typically 18.
It should be said that there are other ways to consolidate debts, such as:
- Balance transfer credit cards to consolidate credit cards only
- Remortgaging to release equity and use the money to pay off debts. Secured loans like these present greater risks.
- Some debt solutions are comparable to consolidation, although not exactly the same.
Is it a good idea to get a debt consolidation loan?
Debt consolidation can be an effective way to make managing your money easier and prevent debts from growing. Moreover, it is proven to help lots of people save money by securing lower interest rates on their new monthly repayment.
But that doesn’t necessarily mean you should consolidate your debts. Everybody’s situation is different and there may be a better way to tackle your credit problem. A free debt advice charity can provide an assessment of your situation and recommend the most efficient and effective way out of your debt.
How much can I borrow?
You can typically borrow between £1,000 and £25,000. Some lenders only lend between £7.500 and £25,000. If you want to borrow more or less than what is allowed, you’ll need to search for a different loan provider. Asking for more credit than you need is not a wise idea and could result in bigger debt.
Can I get a debt consolidation loan with bad credit?
When you apply for a loan to consolidate your debts, the lender you apply to will complete a credit check. Those with an average to excellent credit score are likely to be accepted and offered an interest rate close to the lender’s APR representative example.
If you have a poor credit score, you might be rejected, or you might be approved but offered an interest rate much higher than the advertised APR representative example. If the interest rate offered is higher than expected, this loan may no longer be beneficial for debt consolidation purposes.
All lenders will need to know you can afford the loans, which means having a stable income from a job.
Debt consolidation loan comparison
To compare debt consolidation loans between different lenders, you can use the representative APR. This is the rate that at least 51% of applicants received, but it doesn’t mean you’ll be offered this rate, so take it with a pinch of salt. There are many online websites that provide a debt consolidation comparison function to make things easier. Don’t rely on these entirely as they may not have been updated and you could miss a better deal.
If you want to compare debt consolidation loans with a poor credit score, you may want to consider each lender’s maximum APR as well. This is the maximum interest and fees you can be charged if approved for the loan.
How to get a debt consolidation loan with bad credit
There is no magic formula to get a UK debt consolidation loan with a poor credit score. But there are some things you can do to make sure you’re looking in the right places. The best way to get a debt consolidation loan with bad credit in the UK is to apply to lenders that are more likely to accept people with bad credit.
You can also increase your chances by trying some quick fixes to your score. The most effective way to improve your credit score is to look for mistakes in your credit history. If there is an error, you can ask the lender responsible for the error to remove it, and if they refuse, you can ask the credit reference agency to do it for them. You should also register on the electoral roll, as this verifies your ID and can positively affect your credit score a little.
Where to get a debt consolidation loan with bad credit
Most high-street banks are likely to reject people with bad credit because they have the lowest representative rates on the market (at the time of writing). Debt consolidation loans for those with a bad credit score are usually advertised more prominently by online lenders, although not exclusively.
Read on for some examples!
Debt consolidation loans for bad credit UK
Below you can find five examples of unsecured loan providers advertising debt consolidation loans for people with a bad credit history. These are not necessarily the best on the market or in a particular order. They’ve been provided as examples of what’s available at the time of writing only – and they may be worth considering.
#1: Likely Loans
Likely loans are currently advertising bad credit debt consolidation loans with a representative 59.9% APR. They provide credit from £500 to £5,000 repayable over one, two or three years.
#2: Shawbrook Bank
Shawbrook Bank offers personal debt consolidation loans with a representative APR of 14.9%. They also offer repayment periods up to seven years, which is longer than many other loan providers.
#3: Everyday Loans
Everyday loans are another option, offering generic personal loans for people with a bad credit history. These loans can be used to consolidate debts. They currently have a representative 99.9% APR. The company does have decent Trustpilot reviews with a total score above 4 at the time of writing.
#4: Solution Loans
Solution loans offer short-term loans up to £2,000 and larger personal loans up to £25,000 for the purpose of consolidating debts. They specifically advertise them for people with an unsatisfactory or poor credit rating.
Pegasus offers these loans for people with poor credit and has some of the best customer reviews on the market, even recognised by some big newspapers and finance institutions. They also claim to provide the funds within an hour of approval. You can borrow from £2,000 to £15,000 only. One issue is they don’t show a representative APR and you need to apply to see what you can get.
Will a bad credit debt consolidation loan impact your credit score?
Applying for one of these loans will not have a major impact on your credit score. But applying for many of these loans consecutively could alert lenders and cause your application to be rejected. The only way you can seriously damage your rating is if you fail to repay the loan amount in full and on time. If you don’t, the lender can record payment defaults on your record.
Can I get a guarantor loan for debt consolidation?
An alternative option to a debt consolidation loan for people with bad credit is to look for one of these loans with a guarantor. If the person fails to make their monthly payments on time and in full, it will also be the guarantor’s responsibility. This is why most guarantors are family members or very close friends.
The guarantor must be someone with a good credit rating or a homeowner in the UK. Usually they have to be of a certain age, such as between 25 and 50. If your credit report is stopping you from getting a personal loan alone, this could be a good alternative.
Rejected for a loan? Consider a DMP instead!
And if you cannot get approved for any unsecured loans, a Debt Management Plan is another option. Debt Management Plans are considered a way to consolidate debts without actually consolidating them.
They work by getting multiple creditors to agree to a plan where you make a single monthly payment which is split between everyone you owe. Within the plan, you may even be able to agree for creditors to freeze interest to save you money.
As you don’t pay any creditors off in this solution, you don’t need to apply for more credit and have your credit score assessed. The only downside is that if you are now making underpayments, creditors can report these and negatively affect your credit score. This isn’t certain to happen, however.
Read more about DMPs here!
More bad credit debt consolidation loan info
For more information and answers to common debt consolidation questions, search our other guides at MoneyNerd. We’ve recently published scores of articles on this topic to help future consolidators. And don’t forget that debt charities can provide a personalised support service.
Step Change is one of the best advice charities around, and they operate in Scotland, England and Wales.