How easy is it to get a debt consolidation loan? This is a common question asked by debtors thinking about using a new personal loan with a lower interest rate to pay off other loans and credit card debt.
If you want to know how to get a debt consolidation loan, this guide has answers for you. We discuss all of the things to think about before lodging an application. And remember that debt charities are always available to provide tailored support!
What is debt consolidation?
Consolidating your debt is the process of taking out new credit and using it to pay off two or more of your other debts. Most people who decide to consolidate debts will pay off all their existing debts with the new credit, meaning they now just have one bigger debt and one fixed monthly payment.
When we refer to debts in this way, it could just be credit you have yet to pay back, or it could refer to arrears where you have missed payments or not repaid in full. People in both situations may choose to consolidate their debts for two main benefits.
Benefits of consolidating
There are two main benefits of doing this. The first is that only having monthly repayment to make will make it easier to manage personal finances. Budgeting for a single monthly repayment is easier than juggling many monthly repayments at different times of the month. This in itself could prevent debts from growing.
The second benefit of debt consolidation is the potential to pay less back. If you are approved for a loan with a better interest rate than the interest you are currently paying across all monthly payments, you can save money. This is the driving factor behind why so many people choose consolidation.
What are debt consolidation loans?
Debt consolidation loans are personal loans used for the purpose of paying off other debts. It’s not uncommon for banks and other lenders to advertise loans for specific purposes. For example, you can get a car loan to buy a new vehicle, a home loan for home renovation and you can buy a property with a mortgage, which is also a type of loan.
You might be able to use a personal loan not advertised for the purpose of debt consolidation to consolidate your debts. Always check the fine print to make sure this is the case before applying for a generic personal loan.
These loans are usually offered with fixed rates of interest or with variable rates that are fixed in the beginning but can then fluctuate. If you prefer the peace of mind of knowing exactly how much your loan amounts/payments will be each month, you should look for loans with fixed rates only.
All loans are subject to credit checks. Only ever apply for a loan from a lender that is authorised and regulated by the Financial Conduct Authority (FCA). Avoid loan sharks and online scammers.
Secured Vs unsecured debt consolidation loan
Most consolidation loans are unsecured, meaning you do not have to use your assets as collateral to be approved for one. But you may be able to find secured debt consolidation loans where assets can be seized if you fail to meet your monthly repayments. These secured loans are typically generic personal loans that can be used for any reason.
Yet, if you are consolidating debts by remortgaging, then you are taking out a new secured loan against your property.
How to qualify for debt consolidation
To qualify for debt consolidation, you will need to be approved for a new loan and a loan amount that enables you to pay back at least two existing debts. This means making a new credit application and being accepted based on your individual circumstances and your credit score.
But it’s not just about being able to access credit. You should have your situation assessed to make sure consolidation is the most appropriate method to improve your debt situation.
There may be an alternative that can save you more money or even write off some of your debt. To find out if you qualify from this perspective, you can ask for guidance from a free debt advice charity. They could help you out of debt in the best way for you!
You should also know there are other ways to accomplish debt consolidation aside from personal loans. If you are only wanting to consolidate credit cards, you can complete a balance transfer using a balance transfer credit card. You can also consolidate through debt solutions, such as a Debt Management Plan (DMP) and through remortgaging to release home equity.
Remortgaging your home as a way to consolidate debt is by far the most risky. You should only consider this after speaking with a professional mortgage advisor and a debt advice charity.
Where can I get a consolidation loan?
Debt consolidation loans are available with banks and building societies offering credit products and services. Getting a decision on your application is usually quick, especially if you already have a bank account with the lender in question. These types of personal loans are also available from online loan providers.
You should diligently search the market for the provider with the best APR representative interest rate. But always remember the interest rate you’re offered will depend on the loan amount and individual circumstances.
One useful tool that most loan providers will offer is a loan calculator. The loan calculator allows you to enter the amount of money you would like to borrow to consolidate your existing loans and cards – and how long you need to repay.
A loan calculator should only be used as an estimation of the fixed monthly payments you’ll be asked to pay, and the interest rate you’ll be subject to.
Is it a good idea to get a debt consolidation loan?
You might be wondering why getting a debt consolidation loan would be a bad idea. If you can reduce the number of creditors you deal with and pay less back on existing debt, this can only be a good thing, surely?
That’s correct – but there may be a more appropriate or advantageous solution to your debt problem. There are various debt solutions you could qualify for that can wipe some or all of your debt, saving you even more money.
And we shouldn’t ignore the potential risks of using debt consolidation loans. If you are unable to pay back the money due to unforeseen circumstances, you will still be chased for payment and possibly taken to court.
Moreover, debt consolidation may not address the underlying reason you got into debt in the first place. If you struggle to repay your loan after consolidating, you’ll be in a similar position to now, if not worse. This is why it’s important to search for personal loans with a lower representative APR in comparison.
How hard is it to get a debt consolidation loan?
The difficulty of accessing a debt consolidation loan is comparable to trying to get any other type of unsecured personal loan. Some experts suggest getting a debt consolidation loan is a little more difficult, however, there is not a big difference if any difference at all.
The lender will evaluate how likely you will be able to keep up with monthly payments based on the loan amount and interest rate available to you. A lot of this will depend on your income and how you handled your finances in the past. This means acceptance of these loans are subject to a credit score check. Before you apply for a loan of this kind, you might want to try and improve your score first (more on this soon!).
What credit score do you need to consolidate debt?
One of the biggest credit reference agencies, Experian, states that the very best consolidation loans with the lowest fixed interest rate are only available to people with a “good” or “excellent” credit score. Experian also states that “Good credit” equates to a FICO score of 670 or above. You could use a free subscription to access your file and see how your score fairs against this benchmark. Remember to cancel any free trial or you will be billed each month.
You may be wondering how someone with lots of arrears would have a credit score this high. The reality is they probably don’t.
Keep in mind that these loans are also used by people who are not in arrears. They’re taken out by those who want a new personal loan to consolidate other credit and make repaying their current loans and credit cards cheaper – even if they’re not struggling to repay them in the first place.
It’s not just people with financial difficulty who use debt consolidation loans!
How do I get a debt consolidation loan with bad credit?
The above does not mean you will be automatically rejected for a debt consolidation personal loan if you don’t have a “good” or “excellent” rating. There could still be plenty of lenders willing to accept you for a loan with a poor credit rating.
However, because you are seen as a greater risk for defaulting on payments or not repaying the fixed monthly payment in full, the interest you pay is likely to be higher. Remember that the representative APR example is based on at least 51% of successful applicants only. If your score is worse than the average population then the interest rates offered to you won’t likely be as good as the representative example.
If you want to find creditors that lend to people without a perfect credit score, you can search your options online. Or you can check out this guide which discusses some of the debt consolidation loan options for people with a poor credit history.
On the other hand, you could try to improve your credit file over many months before then using the debt consolidation strategy. Taking your time to improve your file and then applying for a loan could be more beneficial in the long term. The loan amount you need by that time may also be smaller if you’ve continued repaying, making it even more likely to get accepted for the loan.
How to get approved for a debt consolidation loan
There is no sure-fire way of making sure you get approval for a debt consolidation loan. But there are things you can do to improve your chances. Most of them revolve around improving your credit score so creditors believe you are not a risk.
So, how could you lower your credit score? We’ve already explained the importance of looking for credit file errors and having them put right. But here are some additional hints and tips that may improve your score in the short term:
- Get on the electoral register
If you didn’t know already, simply adding your name to the electoral register is a quick way to improve your score. It’s not going to make a huge difference but this small task might be the difference between getting a personal loan accepted or rejected.
Adding your name to the electoral register in your area will slightly improve your credit score because it helps with the identification process. It’s as simple as that!
- Reduce your credit utilisation
Your credit utilisation is the amount of credit you have been approved for against the amount of credit you have used. For example, if you have been approved for three cards of £500 each and you have spent £750 across those three cards, you have a credit utilisation of 50%.
Reducing your credit utilisation is another term for reducing your debt, which will improve your score. However, it can be better to keep credit accounts open even if the balance is 0, Closing the account will make your credit utilisation increase significantly.
- Keep up with bills
It’s tempting to think that your ongoing bills don’t matter when you have more serious debts. But you should be putting the same efforts into preventing those bills from becoming debts that you put into clearing your debt. Any missed payment will harm your credit file.
Will I qualify for a debt consolidation loan?
Your debt consolidation loan application will be assessed by the lender you apply to, based on individual circumstances, your credit score, the loan rates and amount – and possibly other factors. Because so many things need to be considered, it’s not possible to say if you will or will not qualify for the debt consolidation loan you apply for.
Some lenders may be able to give you a good indication of how likely you are to be accepted and what interest rate you’ll be offered without marking your credit file. If your debt consolidation loan application is rejected, try not to worry. There are alternative options and strategies you could use that will also help you get back on track.
We’ve discussed them in further detail below…
Debt consolidation loan alternatives
If you do not get approval for a debt consolidation loan, there are other debt management strategies and debt solutions available. Some of the most popular are:
- Debt Management Plans
A Debt Management Plan (DMP) is an informal agreement with your lenders to pay off your debt in one monthly payment. The new payment will take into account your financial difficulty and may not include an interest rate.
- Debt Relief Order
Another debt solution option is a Debt Relief Order (DRO). This is a formal solution that stops creditors from contacting you or asking for payments for a full year. It is only available if you have less than £50 disposable income each month and own no assets worth more than £1,000. If the year ends and your financial situation hasn’t improved, you can write off all of your debt.
- The Snowball Method
The Snowball Method is used when someone has multiple debts. The debtor prioritises minimum monthly payments on each debt, and then any extra disposable income is used completely to pay the smallest debt. Thus, it focuses on reducing the number of debts first.
A word on balance transfer cards
If you would like to borrow to consolidate credit cards only, then another alternative is to use a balance transfer credit card instead of a consolidation loan.
This is a special type of credit card that allows you to transfer the balance of your existing debts (credit cards only!) to the new card. If the new card has a lower fixed interest rate than your other cards then you could save on your payments. Many of these cards include a 0% fixed rate for so many months to help reduce payments.
This could be a more appropriate and lucrative option than applying for loans.
Do debt consolidation loans impact your credit score?
Applying for a personal loan to consolidate your debt will require the lender to do a hard search on your credit file. This does not significantly affect your credit score. If you were to apply for multiple personal loans in a short space of time, then these multiple searches could negatively affect your credit score.
There is only one other way that the activity of getting a debt consolidation personal loan could negatively affect your credit score. If doing so increases your credit utilisation – i.e. the amount of available credit you are accessing at one time – then your score might be affected.
If you do manage to get a consolidation loan and fail to meet your new ongoing monthly payment, the lender can record defaults on your file which will cause your score to deteriorate.
The simplest way to improve your score is to manage your finances effectively and pay off debts and bills in full on time. You may also want to check your file to ensure there are no record mistakes that are causing your score to be lower than it should be. If you see a mistake ask the relevant lender to make a change.
More information on debt consolidation loans
We’ve covered many of the FAQs from debtors about how to qualify for debt consolidation loans. If you didn’t find what you were looking for above, we’ve probably covered it in one of our other consolidation debt guides. Head back to the Money Nerd site and search for your question now.
And remember there are many excellent UK debt charities waiting to help you. They offer free private debt advice to help guide you through the process and recommend the most suitable debt solution based on your personal situation.
Some of the most popular charities include Step Change and National Debtline. If you’ve just started thinking about debt consolidation, pick up the phone and have a chat with a trained advisor!