Can I get a debt consolidation loan with bad credit in the UK?
Yes, you may be able to get a debt consolidation loan if you have bad credit. However, you may be limited in the types of loan you can apply for, and will probably get a higher rate than someone with good credit.
Debt consolidation is the method of combining multiple debts or loans into one. When you take out a debt consolidation loan, you use the funds to pay off your existing debts in full, and then continue to make payments on your new loan.
It’s often used to make your repayments easier to manage and in some cases, can even help you save money on interest payments. If you have bad credit, it can also help repair your credit score if used correctly.
Is a bad credit debt consolidation loan a good idea?
While debt consolidation loans are a useful tool for people looking to manage their debt, they may not always be suitable for those with a poor credit rating. One of the major benefits of a debt consolidation loan is the ability to reduce the cost of your debt by finding a loan with a better interest rate, and therefore, lower repayments.
However, if you have bad credit, you may find your debt consolidation loan options are limited, and the loans you’re eligible for are even more expensive than your current loans. This can make a big difference when it comes to repaying your loan, so it’s important you understand how much your debt consolidation loan will end up costing before applying.
If you take out a loan with a higher rate than your existing loans or debts, you’ll actually end up paying more in interest, and if you then fail to make repayments, you could end up in more debt and do further damage to your credit score.
Will a debt consolidation loan hurt my credit score?
A debt consolidation loan can potentially improve or hurt your credit score, depending on the type of loan you get and how you manage it. While debt consolidation loans can help make your debt repayments easier, it could also hurt your credit score if used incorrectly.
From the perspective of credit reference agencies (CRAs) like Experian and Equifax, a debt consolidation loan is treated much like any other loan. This means you could end up damaging your credit score further if you do the following:
Apply for too many debt consolidation loans in a short period of time. If you apply for multiple loans, you could be seen as an irresponsible borrower, especially if you already have bad credit.
Take out a debt consolidation loan but then fail to repay your existing loans. Taking out an additional loan and not paying off your existing debt could increase your credit utilisation ratio, which is how much of your available credit you’re using at a given time. This is considered a red flag by CRAs and can hurt your credit score.
Fail to make repayments on your debt consolidation loan. According to Experian, your payment history is the key factor used to determine your credit score. Failing to make your repayments on time will therefore have a huge negative impact on your credit rating.
Of course, a debt consolidation loan can also improve your credit score. If you take out a debt consolidation loan that you then use to pay off your existing debt, and make sure you make all your repayments in full and on time, this will be recorded positively on your credit file.
How to get a debt consolidation loan with bad credit
Work out how much debt you need to pay off
Research which lenders will let you borrow enough to pay off your debt
Compare the interest rate offered to those on your existing loans
If the interest rate is manageable, or ideally cheaper than your existing loans, apply for an eligibility check on the loan
If you’re eligible, apply for the loan
Once your loan has been approved and funded, use the funds to pay off your existing debts
Continue making regular repayments on your new loan until it has been paid off
Types of debt consolidation loan for bad credit
Unsecured loan. Depending on your credit score, you may be able to get an unsecured personal loan to cover your existing debts. However, you may be limited in how much you can borrow and may receive a higher rate, especially if you have bad credit.
Secured loan. If you own equity in your house, or have another asset you can use as collateral, you may want to consider a secured loan to consolidate your debt. A secured loan is seen as less of a risk to lenders, meaning you’re more likely to be approved, even with bad credit. You’ll also likely be offered more competitive rates and a higher loan amount than you would on an unsecured loan.
Guarantor loan. A guarantor loan represents less risk for the lender, which will improve your chances of getting a loan. If you have bad credit, a guarantor may also help you get more favourable loan terms.
Money transfer credit card. A money transfer credit card is similar to a balance transfer card, but lets you move money from your card into your bank account. You can then use this money to pay off your existing debts, and then pay off the balance on your card. However, you may find it hard to get a credit card if you have bad credit, and will also likely need to pay a fee to move the funds. You’ll also need a card with a high enough credit limit to cover your existing debts.
What credit score do I need to get a debt consolidation loan?
There is no minimum credit score that you’ll need to get a debt consolidation loan, but if you have bad credit, you many find that the loans you’re offered are even more expensive than your existing loans, which means you’ll end up paying more over time.
Late repayments can cause you serious money problems. See our debt help guides.
Frequently asked questions
Yes, paying off your debt consolidation loan should improve your credit rating, as it demonstrates to lenders that you can handle debt.
Many credit providers will offer loan products that can be used to consolidate debt, including unsecured and secured loans. However, your options may be limited depending on your existing credit score and the amount of debt you need to consolidate.
If you’re still struggling to repay your debt using a consolidation loan, you should inform your lender and seek financial advice. You can get free advice from the government’s MoneyHelper service, or by contacting a debt adviser.
The rate you receive will be based on factors including your credit history, credit rating, the amount you want to borrow and the type of loan you choose.
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Tom Stelzer is a writer for Finder specialising in personal finance, including loans and credit, as well as small business and business loans. He has previously worked as a freelance writer covering entertainment, culture and football for publications like FourFourTwo and Man of Many. He has a Master of Media Arts and Production and Bachelor of Communications in Journalism from the University of Technology Sydney.
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