Getting a Debt Consolidation Loan When You Have Bad Credit

By Angela Monroe - November 15, 2019

A debt consolidation loan is a type of personal financing that allows you to get a new loan to pay off all existing debts. It consolidates all active loans and credit card balances into one single account, hence the name. Aside from freeing yourself from the overwhelming situation of managing different debts in different places, it also helps reduce your interest rate and fees from multiple credits.

Features of a Debt Consolidation Loan

A debt consolidation loan is just another type of personal loan, which favours borrowers with a good credit score and low debt-to-income ratio. If you have impressive credit and bank statement records, you can get the new loan at the best terms, including interest rates at the low end of the lenders’ ranges.

Once approved, the lender will grant you the money to settle all your existing debts and close them. If your loans have an early payout fee, you will need to pay this charge.

Secured and Unsecured

A secured debt consolidation loan requires a valuable asset as collateral. This can be a car or a real estate property. Your lender will appraise the value of the collateral and calculate the collateral cover ratio, which is the total discounted collateral value divided by the total loan request. The higher the ratio, the lower the risk for lenders. This means that you can get the new loan at a lower interest rate.

An unsecured personal loan will not require collateral, which makes it highly risky for lenders to lend you the money. As a result, they may require a strong income and credit rating as their assurance of your financial capacity to repay the loan. The lender may also charge you with a higher interest rate to compensate for the high risk of you defaulting on your loan.

Fixed or Variable Interest Rate

The interest rate of a debt consolidation loan generally falls between 5.99 % to 35.99 %. The rate you’ll get is always dependent on the strength of your credit rating and income, but you can choose between a fixed and variable rate payment options from some lenders.

A fixed interest rate stays the same over the course of the loan, giving you the knowledge of what you need to repay on a set period. It also helps you effectively manage your budget. This is especially favourable if you’ve taken out a new loan with a low interest rate.

Meanwhile, a variable interest rate fluctuates according to the loan market conditions. The rate changes based on the benchmark interest rate or index. As a result, your loan repayment amount will vary. While the changing interest rate does not offer you peace of mind, it usually starts low. It also has low associated fees and flexible repayment features, including an option for early payout.

What if You Have Bad Credit?

While a bad credit debt consolidation loan favours borrowers with good credit standing, you can still qualify even if you have bad credit. This is usually obtained from online lenders and credit unions. The interest rates and fees are also higher. It is best to shop around and compare rates from several lenders before settling for one.

1. Improve Your Credit Score

A bad credit score is a result of negative factors in your credit profile. These include patterns of late repayments on your previous debts, high credit card usage, loan default, bankruptcy, home foreclosure and repossession. While you cannot instantly lift up your bad credit history in an instant, you can fix several factors and eventually improve your score.

  • See what you can fix in your credit records by reviewing your credit report. You can get a copy of your credit report from major credit reporting bureaus. It is best to request a separate copy from each CRB as they may not contain the same information because some lenders report to only one CRB.
  • Dispute any errors or false information you find, like a repayment marked as late that you actually paid on time or a bankruptcy record from 12 years ago. A CRB can only keep a bankruptcy on profile for only 7 to 10 years. The sooner you get these negative pieces of information corrected, the sooner your credit score improves.
  • Start making on-time repayments on all your active loans. Payment history is the biggest factor that affects your credit score, making up 35% of your total score.
  • Reduce your credit card usage to only 30% of its credit limit. This will lower down your credit utilisation ratio, which makes up 30% of your score. 
  • Pay your bills on time. Utility bills, especially mobile phone bills, can now affect your credit score. This happens if you miss multiple payments or choose not to complete your repayments. Your provider may close your account and send it to collections. A record of a charged-off debt being sent to collections greatly hurts your credit score and stays on your credit report for seven years.

2. Shop around and compare rates.

Your choices of lenders are limited, but It’s rarely a good idea to accept the first loan offer you see. Instead, take your time and compare loan options from several lenders. This can be easy with online lenders because you can often check rates with just a soft credit check, which doesn’t hurt your credit score.

In addition to comparing rates, also look at fees, repayment terms and other fine-print items that could affect the cost of your loan. This part of the process can take time, but it might save you hundreds, if not thousands, of dollars if you do it right.

3. Pledge an asset as collateral.

Debt consolidation loans are typically unsecured, meaning they don’t require collateral like a car loan or a mortgage. Yet if you’re having a hard time getting approved for an affordable unsecured consolidation loan, a secured loan might be worth considering.

Secured loans require some form of collateral, such as a vehicle, home or another type of asset. The collateral usually has to be worth enough to cover the loan amount in the event you default. Because of this, it’s typically easier to get approved for a secured loan than an unsecured one, and you may even qualify for a better interest rate.

 

Loans For People With Bad Credit helps Australians across the country get the financing they need even with a tarnished credit history. We offer several financing options including Bad Credit Debt Consolidation Loan. Call us on 1300 769 384 or fill out the Bad Credit Loan Pre-Approval form to get your finance sorted today.

See also:

What are the Advantages of a Bad Credit Loan?

How Many Months Does It Take to Fix Bad Credit?

Top Myths About Bad Credit Personal Loans That Should Not Discourage You

Angela Monroe
Angela Monroe is the Community Manager at The Positive Group, specialising in giving people the information that they need when they need it, and putting you on the path to a fair financial future. She has 8 years of experience in helping Australians find the right finance solutions, and regularly contributes articles to empower Australians with the knowledge they need to become financially healthy.

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