Debt Consolidation - Consolidation Loans with Bad Credit

Published: 10 November 2008

Debt consolidation is the process of amalgamating multiple debts – credit cards, loans, hire purchase agreements etc. – into a single debt. This involves taking out a further "consolidation" loan for the total amount of existing borrowing. Or perhaps a little more, depending on the terms and conditions of the loan and the financial circumstances of the individual borrower – but using that loan to repay in full each of the individual debts. If your credit rating is poor – as the result of arrears or defaults on previous credit agreements, CCJs ("County Court Judgements") against you, etc., for whatever reason – or you are experiencing financial difficulties, you make think that you are ineligible for a consolidation loan, but this is not necessarily the case. The effects of the "credit crunch" have meant that consolidation loans with bad credit are more difficult to come by, particularly from traditional high street lenders, but this does not mean that such loans are unavailable. In fact there is any number of companies offering consolidation loans to borrowers with poor or impaired credit histories and competition in this sector of the market place is fierce.

Consolidation Loan Features, Benefits & Considerations

A consolidation loan, if chosen carefully can reduce the total amount of interest payable on a debt. Credit card debts for example are typically subject to an APR ("Annual Percentage Rate") of 17%, or higher, whereas a consolidation loan may be available with an APR as low as 8% even if your credit history is less than perfect. Furthermore, if you have debts such as credit card debts, where it is possible to repay just a minimum amount each month the tendency is to do so. This means the debt continues to accrue interest month after month, and in practical terms never really becomes any smaller. A consolidation loan, on the other hand requires fixed – affordable but nonetheless fixed – monthly repayments. This means that not only can you repay the debt in full, in a reasonable time frame but you can actually see the debt reducing, which may give you extra impetus to keep your finances on the straight and narrow.

You need not necessarily be a homeowner to apply for a consolidation loan with bad credit – tenants too can also apply, albeit for typically smaller amounts – but if you are it is likely that you will be offered a "secured" loan at least in the first instance. This type of consolidation loan is secured against the equity in your home – that is, the difference between its market value and any "claims" (mortgage or other loans) against it – so your home may be at risk if you do not keep up repayments on the loan. A secured loan is therefore a major undertaking and should not be considered without a detailed examination of your personal finances including independent professional help if necessary. If you do decide that a secured consolidation loan is right for you however, being accepted for a loan may be easier – because of the less rigorous criteria involved – than an unsecured loan and you may be able to apply for a larger loan, over a long repayment term. Do bear in mind however that the interest rate of any consolidation offered is still likely to be higher than that offered to borrowers with average or better credit ratings.

If you do not own a home, or any other form of "collateral" you may need to apply for an "unsecured" loan. In this case, your perceived risk – that is, perceived by a lender – is higher, because a lender has no guarantee that the loan amount will be repaid in full; a secured loan offers no absolute guarantee per se, but a borrower is much less likely to default on loan repayments if his, or her, home is involved. This means that the application process may be more difficult, with more rigorous eligibility criteria, and that the interest rate may be higher still; this may still not be prohibitive if you are looking to consolidate a number of high interest debts.

Beware of application fees, if these are requested before your application is accepted – if your application is rejected you are entitled by law, to the return of any application fee but some less scrupulous lenders may attempt to retain it – and likewise of PPI, or "Payment Protection Insurance". This type of insurance is often peddled expensively, alongside loan products and is intended to protect a borrower from accident, illness, redundancy or any other unforeseen circumstance that would reduce his or her ability to repay the loan. You should consider carefully, whether PPI is necessary – it can increase the overall cost of a loan substantially – and even if it is, that does not mean that you need to buy it from your loan provider.

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