How Can I Consolidate Debt With Bad Credit?

Dealing with bad credit makes life that much more expensive. Missed payments to creditors become commonplace. Bad debt increases, and you’re left struggling with what to do.

However, you don’t have to live with bad credit. You can improve your credit rating by using secured debt consolidation loans like a second charge mortgage or homeowner loan.

So, how prevalent is bad credit in the UK? According to some estimates, 20% of people in the UK have poor credit, with 10% having no access to credit due to their poor credit history.

That means an estimated 6.9 million people in the UK have either been rejected for credit or don’t even bother applying.

How can I consolidate debt with bad credit

How debt consolidation loans work

Debt consolidation loans are simple. All your outstanding debt is combined into one larger loan. All your creditors are paid in full, and your access to these credit sources is closed.

With debt consolidation loans, you’ll pay a lower monthly payment overall courtesy of a lower interest rate. This improves your finances by giving you more cash on hand.

Using debt consolidation loans can improve your credit score, not lower it. The only way your credit score would decline is if you were unable to make payments on your consolidated loan.

In addition, not all debt consolidation loans are the same, and not all UK lenders provide the same types of debt consolidation loans.

In an ideal world, you would use debt consolidation loans long before your credit was impacted. However, there are numerous reasons why this doesn’t happen. For some, the fear is that using debt consolidation loans will further lower their credit score.

Others are concerned they won’t qualify. Regardless, in many instances, individuals have no choice but to use debt consolidation loans long after their credit has declined.

Keep reading – Debt consolidation loan brokers or try our debt consolidation loan calculator.

How someone with bad credit can use debt consolidation loans

If you have a bad credit rating and can’t keep up, using debt consolidation loans is the best course of action. It demonstrates your initiative to improve your credit rating and is looked upon favourably by UK creditors. However, the key is to never miss a payment.

The first step is to understand the difference between good debt and bad debt. Good debt, like mortgages, has much lower interest rates, whereas bad debt, like credit cards, has extremely high interest rates.

Good debt builds wealth. Bad debt leads to impulse buying. With bad debt, you’re simply buying something on credit because you can’t afford to pay for it now.

The next step is to total up all your bad debt. Afterwards, total up all your monthly payments on this bad debt. You’ll need this amount to understand how much the debt consolidation loan is saving you. It’s also critical to choose the right kind of debt consolidation loan.

Next, ensure your new monthly payment to your new consolidated loan is lower than what you are currently paying on your bad debt.

Try to secure a consolidated loan with the lowest possible interest rate. The lower the interest rate, the less you’ll pay monthly.

Finally, be mindful of cash flow. Choose a payment plan you can afford and that won’t put undue strain on your monthly finances. While you want to pay off your debt as quickly as possible, you can’t do it at the expense of limiting your monthly cash on hand.

Define Your Bad Debt
1. Credit cards, credit lines, high-interest loans
Total Up Your Bad Debt
Total Up Your Monthly Payments on Bad Debt
Define How Much You Save on Monthly Payments
1. Compare your new monthly payment with your consolidated loan to your previous monthly payments.
Choose an Affordable Payment Plan
Be Willing to Negotiate Interest Rates (if possible)

Now the question becomes, which types of debt consolidation loans are best?

Secured vs unsecured debt consolidation loans

Debt consolidation loans are either secured or unsecured. With a secured loan, you use your home, property, or other high-value asset as collateral to essentially “secure” the loan.

For lenders, secured loans are more secure – pun intended.

A secured loan represents less risk to lenders. This is because if you are unable to make your payments, the value of the home will be used to recoup the loan.

With a secured loan, you receive a much lower interest rate, can borrow more, and have better payment terms and periods.

Unsecured loans are not backed by assets. Because there is no collateral for the loan, lenders must assume more risk.

As such, they charge higher interest rates. Whilst these interest rates are higher than secured loans, they are lower than the interest rates on bad debt. If not, you should not move forward.

Secured Loans
- Assets like your home, second property, or other high-value asset is used as collateral.
- Lenders take on less risk
- Lenders provide better interest rates
- Lenders allow you to borrow more
- Lenders provide better terms and payment periods
Unsecured Loans
- No assets are used as collateral
- Lenders assume more risk than secured loans
- Lenders charge higher interest rates than secured loans
- Borrowing amounts will be lower
- Lenders may limit terms and request shorter payment periods

The best secured debt consolidation loans

The best-case scenario is that you own a home or property and can use a secured debt consolidation loan. If that’s the case, these are the best debt consolidation loans to choose from.

Remortgage:

When you purchased your home or property, you were provided with a mortgage. Over time, your monthly payments have reduced that mortgage. Meanwhile, your home’s value has increased.

With a remortgage, you’re simply accessing the wealth you’ve built up in your home. The combination of paying your mortgage and your home’s increased value is called equity. It’s that equity that is used to consolidate your bad debt.

A remortgage is a secured loan because it uses the equity within your home to secure a new mortgage. Your old mortgage is essentially paid in full, and a new mortgage amount is provided. Your bad debts are paid off from the equity of your home, and those debts are closed.

Second charge mortgage

A second charge mortgage is like a remortgage, with the exception that the second charge mortgage is provided by another financial institution or bank. Often referred to as a homeowner loan, the amount you can borrow with a second charge mortgage is still determined by the amount of equity in your home.

However, the interest rates, amount you can borrow, and terms of a second charge mortgage will not be as favourable as a remortgage.

With a second charge mortgage, the lending institution is second in priority to your first charge mortgage provider. If, for some reason, you cannot make your mortgage payments and your home is sold, your first charge mortgage lender would be paid in full before the second charge mortgage lender is paid.

With a remortgage and a second charge mortgage, lenders will not allow you to borrow all the equity in your home. To ensure you do not overextend yourself with mortgage payments you can’t afford, UK lenders will limit your borrowing to approximately 95% of your home’s equity.

Regardless of how much you can borrow, it’s always best to only borrow what is needed to clear your bad debt.

Unsecured debt consolidation loans

If you do not own a home, then your best option is to use an unsecured debt consolidation loan. Even though the interest rates, borrowing amounts, terms, and payment conditions aren’t as good as secured loans, you should still be able to significantly reduce your interest rates and monthly payments.

Regardless of whether you’re using a secured loan or an unsecured loan, always be willing to comparison shop. If you own a home and your first charge mortgage provider isn’t willing to work with you or won’t provide you with favourable terms, then investigate a second charge mortgage or homeowner loan.

Helping you future-proof your finances

As the go-to solution for UK residents wanting expert financial advice and guidance, we take great pride in our ability to help our customers achieve a better financial future.

Whilst we are primarily a finance brokerage firm, we are equally adept at helping our customers future-proof their finances and investments with expert advice on commercial mortgages, retirement investing, and tax planning.

If you have bad debt and want to put an end to it once and for all with an experienced team of seasoned finance experts, contact us now.