One way to ease the burden of paying back several loans is to consolidate debt. Our guide explains what you need to know to help you find the best debt consolidation loan.
If you have problems with bad debt loans might not seem like the obvious way out the red, but can sometimes offer a way to organise your finances and lower the amount you pay.
So even if your circumstances have left you with bad credit consolidation loans could still be an option.
Rather than paying off all of your loans, credit cards and overdrafts with several different payments each month, a debt consolidation loan could allow you to make just one payment per month, making it easier to get your head around exactly what you owe and how much you need to pay to back overall.
Secured or unsecured loans
If you don't own your own home or are not willing to risk losing it if you can't make your payments, an unsecured loan may be your best bet, as your home will not usually be put at risk if things go wrong.
However, many of the loans available to those with bad credit will only be offered to home owners. If you own your own home, you might be offered a secured loan that uses your equity as collateral, but be careful, as these loans often take a long time to pay off and can put your home at risk if you can't pay back what you owe.
Work out the amount you need to borrow
The amount you borrow will affect which loans are available to you and the interest rates they'll charge. You'll pay more interest if you borrow more than you need, so spend some time working out exactly how much your debts total to avoid taking on too big a loan. Find out if you'll need to pay any exit fees when you pay off your existing loans, and include this in your total amount to borrow.
Choose the term you'll repay the loan over
Choosing how many months you repay the loan over is an important decision.
If you go for a longer loan term than your debts currently run over, this may reduce how much you pay each month, but the total amount you pay back might be higher due to paying more in interest.
You'll need to keep the monthly payments at a manageable level, but you should try to keep the term of the loan as short as you can afford.
Look into transferring several balances to a new credit card
If you have several credit card debts, it might be cheaper to transfer them all to one card with a lower interest rate instead, meaning you would only have to make one monthly payment.
Some credit cards have a 0% interest rate on balance transfers for several months, but may not be willing to offer these if your credit rating is poor.
Beware any fees
As well as arrangement fees charged by the lender for setting up the loan, there might be fees for transactions, any phone calls the lender has to make to chase arrears, and any letters they send out. Don't forget to include these when you work out the total cost of the loan and compare it to what you're currently paying.
You will also need to check that your current loans won't charge you for paying back what you owe them before the term of the loan has ended.
Consider a fixed interest rate
A variable loan can be a more flexible way to repay what you owe, but the interest rate can go up or down, so the amount you need to pay will vary.
If you're using credit consolidation to reorganise your finances, you'll probably want to be able to plan ahead and budget carefully. If so, a fixed rate loan will suit you better, as you'll repay the same amount each month and know exactly when it will be paid off, which could help you organise your finances.
Make sure you're eligible for the loan
When you apply for debt consolidation loans bad credit will make you look like a risky proposition to lenders, which could put them off approving the loan.
This means it's worth looking into companies that lend specifically to borrowers with poor credit, as applying for credit too many times will only make your rating worse.
It's also worth checking if they have any other eligibility criteria, such as:
Your age
That you have been a UK resident for three years or more
That you have a current account
That you have a regular income
Compare debt consolidation loans for bad credit
When you look into consolidation loans poor credit will mean that the rates you're offered will be higher than those you see. This is because the interest rate they advertise is the Annual Percentage Rate (APR), and there's no guarantee this will be the rate you pay. Lenders have to offer the APR to 51% or more of their applicants, but they'll charge higher interest if your credit rating is low.
That's why it's important to make sure you find the best rate you can in our debt consolidation bad credit comparison. As well as looking at how much it will ease your monthly payments, work out how much the new loan will cost over its term and compare this to what you'll pay in total with your current arrangements.
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