Can I Get a Debt Consolidation Loan with Bad Credit in the UK?

In the UK, it is possible to get a debt consolidation loan to help better manage debt. Moreover, even those with a bad or very bad credit score in the UK can access debt consolidation loans. However, the options available may be more limited with certain lenders. This guide explores in more detail what debt consolidation loans are, how they work, and how you can get one if you have a bad credit score in the UK.

What Is a Debt Consolidation Loan?

So, first things first, what exactly is a debt consolidation loan and how does it work? A debt consolidation loan is a loan, often secured against the borrower’s property, which enables people to combine all existing debt into one single monthly repayment. 

A loan secured against someone's property is also known as a secured loan, second mortgage, homeowner loan or second charge mortgage. Hence, the idea of a debt consolidation loan is to make debt easier to manage, so that all payments are done monthly in one single payment. Doing this allows borrowers to save money on the cost of monthly repayments by paying lower interest rates.

What Are the Benefits of a Debt Consolidation Loan?

There are many advantages to a debt consolidation loan. From helping make the debt more manageable to help you save costs in interest rates, there are many reasons why a debt consolidation loan might be a viable solution for you. Below, find some of the many advantages of debt consolidation loans in the UK:

Financial Control 

Taking out a debt consolidation loan could be a good idea for those who need help with their long-term budgeting. By taking out one loan to consolidate all existing debt, you can manage your finances better and stay in control. Rather than manage multiple loans or lines of credit, you will have just one fixed monthly repayment making it easier to budget in the long run.

Save Money Long-Term

Another reason you might wish to take out a debt consolidation loan is to save money. Often, debt consolidation loans can offer a lower interest rate than other forms of loans or credit. This means that by shifting all your debt to one low-interest loan, you could save a lot of money for the remainder of your loan term. 

Rebuild Your Credit Score

If you have a less-than-perfect credit score, a debt consolidation loan may help rebuild your credit rating. The payments are more manageable, and therefore, can help you rebuild your credit score as the loan is repaid. Similarly, if you build up your credit score, you’ll also increase your chances of securing a loan at a lower rate of interest in the future. 

Can I Get a Debt Consolidation Loan with Bad Credit?

It is possible to qualify for a debt consolidation loan even if you have bad credit. In fact, a debt consolidation loan may be one of the best loans for bad credit in the UK. However, that being said, your choices may be slightly more limited. But, that’s not to say there aren’t lenders or companies who are willing to work with you and find you affordable and competitive interest rates. 
If a credit reference agency shows that you and your partner have poor credit scores, this may affect the amount you can borrow and mean higher interest rates on any loan that might be granted. Staying within your credit limit will improve your credit score.

Is It a Good Idea to Get a Debt Consolidation Loan?

Debt consolidation loans could be a good move for those with bad credit as it could be the first step towards clearing their overall debt and managing their finances better. 

For example, if you have £15,000 of outstanding balances on credit cards, £5,000 on a store card and £20,000 on a loan, a debt consolidation loan for £40,000 would clear this debt and manage your payments into just one monthly debt repayment. When doing this, you have better control because you are able to see exactly what you owe at any time and have only one direct debit being collected each month. That means there is less chance of missing a repayment and negatively impacting your credit score.

Furthermore, lower interest rates may be offered in comparison to other existing loans and credit cards for someone who has had a very minor blip in servicing their finances. Hence, monthly repayments may be lower for some borrowers.

However, with someone who has bad credit, it is likely that the interest rate on the secured consolidation loan might be higher, meaning that the only way to make a significant monthly saving would be to take out the loan over a longer period of say 15 years to 20 years. While the monthly outgoings might be significantly reduced, it needs to be remembered that by extending the term of the loan the amount of interest that will be repaid will be considerably more.

To reduce the overall amount of interest that is to be repaid it would be good advice for borrowers to make regular additional repayments which would have the benefits of repaying the loan more quickly and paying less interest. 
It is important to keep in mind and check the terms of your current personal loans and credit cards before applying for a debt consolidation loan. Some of your current loans might have early repayment fees, meaning borrowers will be charged for moving debt into a debt consolidation loan.

Also, it would make little sense to pay off credit cards with 0% interest or loans where they are only say 6 repayments left on the loan.

Where Can I Get a Debt Consolidation Loan with Bad Credit?

Working with a loan comparison site can help you compare different lenders and deals across the market. They will often have an eligibility checker built into a loan calculator to check your eligibility before formally applying for a loan. You can find out which lenders are best suited to your needs. Not only that, loan comparison sites can typically show you your chances of being accepted by different lenders - this can prevent you from unsuccessful applications and from further damage to your credit score.

If you do have a bad credit score, or perhaps are particularly struggling with managing debt, then it is always advisable to speak to a financial advisor before applying for a loan. While a debt consolidation loan may be a viable solution to help you repay your debts, it must be the right solution and not a loan at a higher rate over a longer term.
A professional mortgage broker would also be able to explore other options including a further advance with your current lender, or a remortgage. Initial discussions could be held without affecting your credit score.

One suggestion would be to make contact with your existing lenders to see if they can come to an arrangement for a period of time where you make reduced repayments. It is worth noting that you should make contact with them before you start missing repayments as they are more likely to help you if you've approached them in the first instance.

In particular, second mortgages which act as secured loans may increase your chances of getting one. These allow borrowers, even with bad credit, to secure an asset (like a property) against the loan to borrow the money.