Debt Consolidation Loans for People with Bad Credit
If you’re feeling overwhelmed with trying to juggle several payments to different lenders on different dates each month, all with different interest rates, then a debt consolidation loan could be a good option for you to consider.
In this article, we will look at what debt consolidation is, how it works and what options may be available to you.
What is debt consolidation?
Debt consolidation is when you merge all of your outstanding unsecured debts, such as credit cards, overdrafts, store cards etc into one single debt. This means that you will be making one fixed payment to one lender each month instead of to several.
There are two types of debt consolidation loans; a homeowner loan also known as a secured loan and a personal loan also known as an unsecured loan. The debt consolidation loan that you choose is dependent on a few factors such as, your credit history, the amount you want to borrow, whether you are a homeowner and the length of the loan term.
What are the advantages of consolidating debt?
There can be considerable benefits to consolidating debt, these include:
- Being able to budget better.
- Having a clearer view of your debt.
- Potentially lowering the interest rates you pay. You could also save on loan fees and charges as you pay the costs for one loan instead of paying several sets of ongoing fees.
- By reducing your interest rate and monthly repayments, debt consolidation could help you become debt free sooner.
- It can help improve your credit score. If you are making late payments on your accounts, it can significantly hurt your credit score. However, consolidating your debt into one place and staying on top of the payment will help you to rebuild your credit rating.
Are there any disadvantages to consolidating debt?
Debt consolidation isn’t right for everyone and their current situation and as with every type of loan; you need to take all drawbacks into consideration before taking on a new type of debt. These include:
- The total cost of the loan could work out more expensive. Even if the new loan rate is lower than your existing credit account, if the repayment period is longer the amount of interest you pay back overall could be more.
- Having just one loan to pay off creates the illusion that you have less debt. It is important to know that you still owe the same amount of debt; it’s just all in one place. You may be tempted to use credit cards again after they’ve been paid off however it’s imperative that you don’t fall into this trap.
- The possibility of higher fees. You may be charged a percentage of the amount of money you’re borrowing just to set up the loan.
- There could be early repayment penalties if you want to pay off the loan before the end of its term.
What are my options for consolidating debt with bad credit?
Debt consolidation loans fall into two categories; secured and unsecured.
Secured debt consolidation loans are usually easier to get approved for than unsecured loans, this is because they use an asset, such as your home, as collateral to reduce risk for the lender especially if there is a history of missed or late payments. However, this means that if you miss payments on the loan, your home could be repossessed.
Unsecured debt consolidation loans usually come with a much higher interest rate because the loan is not taken out against anything. The amount you can borrow will be based on your credit rating and as long as you don’t default on any of the repayments of the loan then it could help to rebuild your credit score.
Being in debt can be extremely stressful so it’s important that you don’t jump into an agreement without considering all your options and making sure that you fully understand all the terms and conditions of the loan. We recommend that you speak to an advisor who can grasp a good understanding of your personal circumstances and advise you on the best course of action to obtain your debt consolidation loan.