Debt Consolidation Loans
Managing spiralling debt can be a huge problem for many. Across the UK, almost a fifth of adults have a level of borrowing that is causing them problems and if left unchecked, these debts can grow until they reach devastating levels. Taking control of them is a step towards a less-stressful financial life – and loans for debt consolidation can help a lot.
First, it’s important to understand that there’s no such thing as specific debt consolidation loans in the UK. Many different types of loans can be used to better organise your debt, and just because a loan is advertised as ‘debt consolidation loans for bad credit UK borrowers’, or similar, doesn’t mean there’s anything special about the loan itself. It’s the intent of the loan (to sort out your debt) rather than the type of loan that makes it a debt consolidation loan.
That said, the term is used a lot and there are some loans that are far better suited for debt consolidation than others.
One of the biggest problems that occur due to debt is a loss of control. An overdraft here, a credit card there, a store card in the back pocket and an unpaid council tax bill – all these separate issues meaning you have direct debits flying out of your bank account here and there throughout the month. A single slip-up and there’s a charge to deal with or someone sending you a nasty letter. The sheer difficulty of organising multiple debts can make it feel like a full-time job.
Plus, there’s the confusion over interest. One account seems to charge you £30 per month in interest, a credit card is putting on £50 and a third only £40, and maybe you’ve had some fees for late payment on top of that. One was on an introductory rate for the first year, but has that passed? What’s it on now? That overdraft was unarranged, but this one has a free first £250 limit, so you’re only being charged on the second £250 and…
Debt management means taking control of all that and with a debt consolidation loan, you can bring it all under one roof.
One monthly payment.
One interest rate.
The chances are high that if you are already struggling with debt, your credit score isn’t as healthy as it once was. Getting debt consolidation loans with bad credit and no guarantor can be tricky, but it can be done and will help you out of the hole you feel you are in. Poor credit scores should not be a barrier to finding debt solutions.
The keys to a good debt consolidation loan are:
Affordable monthly payments
In an ideal world, those four things would be easy to come by and knowing what the best debt consolidation company is to use would result in a simple answer and link to their website! Unfortunately, those four factors rarely line up and your personal situation needs tailoring to. What works for one person is rarely the ideal set-up for a second.
Unsecured personal loans
An unsecured debt consolidation loan has quite a lot going for it. An unsecured loan is not tied to any asset (property or belongings) which means that if everything goes wrong, you are not losing your home or car. The lender will assess you mainly on two criteria:
Your credit history
Your credit history or credit report is a detailed look at the past six years of your financial activity. If you have missed payments, defaulted on a loan, had CCJs or have previously entered a debt management process, it will show up here. Prospective lenders want to know that they are going to get their money back (plus the interest) and your credit history gives them a good idea of your attitudes to debt and your suitability for a loan.
Of course, when looking at debt management, a period of poor history is somewhat expected. Direct consolidation loans for bad credit do exist, with direct lenders (banks and institutions) being willing to listen and understand your personal circumstances in most cases.
Taking out a debt consolidation loan is going to (hopefully) improve your credit rating in the long-run, and lenders understand that and can be more forgiving than you might at first think. Unfortunately, they often try to reduce their increased risk by making the loan more enticing for them with things like increased interest rates, etc.
What is affordability?
Affordability is a measure of your income against your outgoings. If you are always strapped every month, praying for payday to come around so that you can keep going, then your affordability is going to be low. If, however, there’s always a little spare cash left over for savings then your affordability is higher.
Like credit rating, lenders understand that people looking for debt consolidation loans tend to have poor affordability scores and do consider those circumstances. But, like credit ratings, poor affordability can lead to rejection for a loan and might mean a rise in interest rates above-the-average.
An unsecured loan is available from many financial institutions. Banks are the obvious choice for many, but don’t feel you have to get a loan from the bank you hold your current account with, or a bank at all. Other options, such as peer-to-peer lending, or other institutions offering loans online can be far more suitable for your personal circumstances, especially if you are looking to get a debt consolidation loan with poor credit.
When you apply for any personal loan, you will be asked to provide a reason for the borrowing. Be honest and put ‘debt consolidation’ here, as it will help when questions are raised regarding your current credit situation.
Unsecured personal loans are typically available up to £25,000. If you are looking at total debt higher than this figure, you may want to consider some of the other options.
Remember, you are looking for the lowest interest rate possible and the difference between institutions could be staggering. It’s important that you shop around and compare loans – don’t just take the first one you see.
The difference between an advertised interest rate and your actual offer
There is very likely going to be a difference between the interest rate the loan is advertised at and the actual rate you are offered. Be careful with this and don’t just sign eagerly without considering the rate.
Prior to your credit check, a rate might be shown as being low – sometimes 8% or so. Once you go through the process, you find you are being offered something much higher – 29% or more! Having gone through all the process so far, and seeing that your loan application will be accepted, you sign up without thinking further.
Remember the beginning, when you started applying for this loan because it had the best rate. 8% in a world of 17% - 19% competitors? Go back and try one of those others and see what the real end-rate is. They might advertise at 17% and come in at 23.5%, making them a superior option to the 29% you nearly signed up for!
Advertising a rate in this way is perfectly legal for the institution, as long as they give the advertised rate to some people – and they will, to the people with good credit scores and no real need for the loan!
Balance transfer credit cards
While not often advertised as debt consolidation, 0% balance transfer credit cards can be the perfect solution if you plan to pay back the loans quickly.
These cards typically have a high-interest rate once the 0% period is over (30% or more), but can give you a long period of breathing room where you can pay back the balance without incurring any interest. A 0% loan of this nature is always better than any alternative!
Balance transfer cards may require you to have a less-than-awful credit rating, and many of them will only transfer debt from another credit card, but look around and you can find those willing to offer cash advances or debt transfers that will allow you to clear any other type of debt. Make sure that the cash advance is also at 0%, and don’t get stung by a card offering 0% balance transfer on credit cards but a high 35% or so on other debt balances.
Plan your repayments for your balance transfer card well, depleting your debt as quickly as you can afford to. If you find yourself approaching the end of your interest-free period, look to move to another 0% card or an unsecured personal loan to take over with whatever balance is left.
Remortgage – a secured personal loan
Some of the best interest rates available for loans in the UK are with a mortgage. Using your property to secure a loan will mitigate the risk for the lender meaning you will be able to access higher sums of money at lower interest rates and with poorer credit.
When compared to the 20% and higher rates of many unsecured loans, a remortgage at 5% to 8% is a very attractive offer.
If your house is joint-owned, then you will need to discuss the arrangement with your partner and get their agreement. Joint loans for debt consolidation in this way are the responsibility of both of you and put both of your home at risk if you don’t repay on time.
A remortgage is often the best solution for larger debt consolidation requirements, with loans available for up to 75% the value of your home.
Guaranteed debt consolidation loans
If you are unable to find a suitable lender who will give you the money you need in your name alone, you may want to consider a guarantor to help you. A guarantor is a third party (often a family member) who is willing to sign as backup for the loan, agreeing to pay the debt if you fail to do so. Often guarantors will be expected to further secure the loan against property, so if you ask someone to guarantee a loan for you in this way, you must be sure that you can cover the repayments.
At Compare UK Quotes, we recommend that you consider a guaranteed loan only if you have exhausted your other options, as the pressure it will put on your relationship with your guarantor could damage your personal life. Often, even just asking someone to help in this way causes problems as they might need to say no, but they don’t want to let you down.
Loan types to avoid
While there are many good loans, a few should generally be avoided when you are looking to consolidate debt:
- Payday loans – high interest rates make these short-term loans completely unsuitable for use in debt consolidation.
- Overdrafts – overdrafts are another short-term solution that can result in bad debt, higher interest rates and multiple bank charges if overused in this way.
- Personal borrowing from friends and family – the difficulty and damage that can be done to personal relationships when lending are significant and should be avoided. Asking a family member to cover your debt should be considered a no-no by anyone seriously looking to improve their finances.
- Loans that are too small – if your total debt totals £12,000 and you can get a loan for £8,000, it may seem prudent to use that to clear most of the other debt and go on in that way. Unless the interest rate on the smaller loan is significantly lower than you are otherwise paying, this is rarely a good move as it just stretches your credit for little real management reward.
One of the purposes to getting a debt consolidation loan is to lower the overall interest you are paying on your debts. The ideal situation is to get a loan large enough to cover every other outstanding debt (other than your mortgage, which should never be considered for a debt consolidation loan other than a full remortgage) and at an interest rate that is lower than the lowest of those debts.
For example, if you had an outstanding personal loan at 23%, a credit card at 17.5%, a store card at 29% and an overdraft that worked out at 18%, you would be looking for a debt consolidation loan with an interest rate of 17.5% or lower.
However, there is sometimes value in a slightly higher rate if the administration improvements are enough to stop you getting charges. In the example above, 19% or 20% might be valuable if by clearing your loans and combining them into a single monthly payment saved you an average £50 per month in missed payment charges – as is often the case!
Part consolidation (taking out a 20% loan and using it for everything but the credit card and overdraft, in that example) is possible but very messy and not recommended. It’s typically worth accepting the increase in interest for the improvement in management.
Any loan that is badly managed, with missed payments or worse, will negatively affect your credit score. However, it is hoped that the debt consolidation loan will help you manage your finances, not cause additional problems.
Only take on a debt consolidation loan if you can afford the repayments without fail.
There are other ways the loan will impact your credit history. When you apply for a loan, a hard credit search is applied to your record. One or two of these in a short period won’t be seen negatively, but a run of hard searches suggests that the person is struggling with their finances and desperate for credit, and lenders don’t tend to take this very well at all.
If you have applied for a debt consolidation loan and have been rejected, take care before applying for a second. Two rejections and subsequent applications are going to start making it harder each time. It is best to wait a month or two before trying again.
Don’t worry about soft checks, however. These light touches on your credit report that are generated by preliminary loan assessments to check your debt consolidation loans eligibility (like those done by a comparison website) don’t have any impact on your rating and you can do as many of them as you want.
Hard credit checks can only be done with your permission and are held off until you fully apply for the loan.
Over time, repaying your consolidation loan without any problems is going to greatly improve your credit rating.
There is help from government schemes, but not in terms of direct loans. One scheme, the debt management plan, can feel similar to a consolidation loan, by combining all your debt into one monthly managed payment with help from a third-party debt advisory and management service. Read our article about debt management plans for more information.
Only you can know and understand your personal finances to know if a debt consolidation loan is the right path for you. Like all financial products, there are positive and negative aspects to it. A consolidation loan:
Will help you manage your outgoings
Will instantly pay back any outstanding creditors, getting them off your back and halting any nasty proceedings
Will make you feel more in control
Will improve your credit score over time and with regular payments
Could mean you pay less in interest
Could lower your monthly outgoings to a more manageable level
Could prevent you getting extra charges
But there are also disadvantages, where the loan:
Could be difficult to get with poor credit
Will impact your ability to get other credit in the short term
Might feel a burden after years of repayments
Could put your home at risk if secured on it (remortgage)
If you want to apply for a loan that’s slightly higher in order to give yourself a small boost, then you can and in some circumstances, this can be a bonus.
Often, banks and other institutions have offers of better rates when you take out a loan in a particular band – for example, a superior rate for loans of £7,500 to £15,000. It can actually be in your interest to make sure your loan is in this band, even if it doesn’t need to be – a total debt of £6,000, for example, would be best served by applying for £7,500.
When lenders have these offers, they are also more likely to approve a loan in the target offer bracket, so you may find yourself more eligible for a £7,500 loan than a £6,000 one!
Just try to be sensible with the extra money and don’t go crazy! A debt consolidation loan should never be a reason for a spending-spree!
Personal financial advice with Compare UK Quotes
Here at Compare UK Quotes, we have your best interest in mind. Our library of personal finance articles are some of the best in the UK so whatever you need to know, from understanding interest rates to planning for your retirement, trust us at Compare UK Quotes.