Many people struggling in debt need a way to escape the stress of paying numerous creditors.
A debt consolidation loan helps slim the number of people you might need to pay back, making your money management situation much easier.
If your credit score is bad, it should not get in the way of your application for a debt consolidation loan. Continue reading this guide to understand all about debt consolidation loans for bad credit.
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What is a debt consolidation loan?
A debt consolidation loan is a way in which you can refinance your debt.
The debt consolidation loan will be a sum of money you can borrow to pay off just the amount of your current credit commitments.
A debt consolidation loan will be money you will need to repay in monthly payments, consisting of a merge of your already existing debts.
Since the debt consolidation loan is a merge of your debts, it makes your life somewhat easier as you will only be paying one creditor now.
How does a debt consolidation loan work?
A debt consolidation loan will work through an application form where you should explain your situation and a bit about yourself.
After completing the application, you should receive suitable funds to repay a creditor.
With debt consolidation merging your existing debt, you will only be required to pay one creditor. The personal loan you will gain will be enough for monthly repayments.
There are two types of debt consolidation loans to choose from- unsecured or secured loans.
What is the difference between secured and unsecured loans?
You must understand what these both mean with two different types of loans to choose from.
Secured debt consolidation loans are the best option for bad credit as they offer a lower interest rate. A secured loan will give the lender an asset; therefore, if you fail to make the monthly payment, this can put the asset at risk.
A secured loan will usually have a longer repayment period available, and they are normally much easier to obtain- therefore, they are more popular.
Here are some examples where secured loans are predominantly used:
- Car loans
- Loans against properties
- Home equity line of credit
Unsecured debt consolidation loans are loans that are not secured by collateral, on the other hand. Unsecured debts are typically riskier, so the interest rates occasionally increase.
Usually, after applying for a debt consolidation loan, the lender will evaluate your financial status to assess whether you will be capable of the monthly payments.
The lender will always attempt to find the best deal possible to ensure you will be able to pay.
Here are some examples of where unsecured loans will normally take place:
- Student loans
- Credit cards
- Personal loans
How can a debt consolidation loan help me?
Keeping up with the on-time monthly repayments can be exhausting and difficult when you are in debt with multiple creditors.
Debt consolidation loans can be extremely beneficial to people with multiple debts as they will merge all of them to pay them simultaneously.
A debt consolidation loan can ensure you do not have to worry about juggling payments as you will only be making monthly payments.
Despite monthly repayments being brilliant for debt consolidation loans for bad credit, the length of time needed to repay will be increased. The time increasing for loan repayments is realistically the only downside for bad credit debt consolidation!
Which debts can I resolve with a consolidation loan?
With a debt consolidation loan, you can resolve your debts, including:
- Store cards
- Catalogue debts
- Credit cards
- Student loans
- Payday loans
- Unsecured Personal loans
Can a debt consolidation loan help my credit score?
Taking out debt consolidation loans for bad credit can be a great way to improve your credit report!
At the start of the process, your initial rating will get worse, then gradually improve your credit score when you pay your monthly payment on time.
How do I know if my credit score is bad?
There is, unfortunately, no official rating system in the United Kingdom that states that you might have a bad credit score.
Some credit agencies will occasionally attempt to rate a credit score out of 999. From 0 to 720 is generally regarded as being poor.
Contacting credit agencies, such as Experian, can inform you whether your credit score is low from their rating system.
Summary
Debt consolidation loans are always important to consider when you are in debt- especially if you have a poor credit report.
Whether you have a secured or unsecured debt consolidation loan, you should keep on track with your monthly payment plan to get you out of your debt.
Find the best debt consolidation loan companies in the UK.