Credit Building > How debt consolidation loans work if you have bad credit

How debt consolidation loans work if you have bad credit

Wollit Team4 minute read · Updated 30th June 2024

A debt consolidation loan for bad credit allows people with poor credit to improve their credit history by combining multiple debts, like credit cards and loans, into one new loan with a single monthly payment.

A debt consolidation loan has multiple advantages, but if you have bad credit, the most important one is that it can help you stay on track with your payments so you don’t have to juggle multiple bills. This can help you avoid accidentally running into missed payments and hurting your score even more.

Also, a bad credit debt consolidation loan works similarly to a regular one but with two significant differences:

On one side, it’s more flexible in its eligibility requirements.
On the other, it comes with higher interest rates to compensate the lender for the risk that you’ll default.

Can you get a loan to consolidate debts if you have a bad credit score?

If you have a bad credit score, you can usually still get a loan to consolidate your debts. Some lenders even specialise in debt consolidation loans for people with poor credit scores.

These loans might have higher interest rates but can help you manage your finances better. To get a good deal, compare rates and consider options like secured loans or loans with a guarantor.

Secured loans are often easier to get approved for because they use something you own, like your house or car, as collateral. But be careful because if you miss a few payments, you could lose that asset.

The same applies if you ask a family member or friend to be a guarantor. If you default, they’ll be on the hook for your debts.

Will getting a debt consolidation loan affect my credit score?

It depends, but it’s likely that applying for one will lower your score a bit, at least temporarily.

First, any time you apply for multiple loans at once, you can harm your credit score. To avoid this, consider going through an eligibility checker first and only make one application.

Second, your credit score is also influenced by your “credit mix”, which is how many different kinds of loans you have. Replacing a mix of personal loans and credit cards with just one loan can reduce your credit mix and lower your credit score somewhat.

However, these effects don’t last long. Over the long run, a debt consolidation loan can actually help improve your credit score, as long as you make all your payments on time.

Will I need a credit check to get a debt consolidation loan?

When you apply for a loan you always have to go through a hard credit check. Debt consolidation loans are no exception, even if you have a bad credit history.

This check helps lenders assess your creditworthiness and calculate the loan’s interest rate and terms.

You shouldn’t worry, though. While it’s OK to be nervous about the impact on your credit score, the effect is temporary.

What kinds of bad credit debt consolidation loans are there?

There are three main types of debt consolidation loans for bad credit:

Secured debt consolidation loans: These loans require collateral, such as equity in your home, which the loan is secured against. This type of loan offers two main advantages: you can borrow a larger amount and secure a lower interest rate. However, if you fail to make repayments and default on the loan, you risk losing your home.
Unsecured debt consolidation loans: These loans do not require collateral and are typically more challenging to qualify for if you have bad credit. They may offer higher interest rates compared to secured loans, but they at least do not come with the risk of losing your home.
Guarantor loans, if you manage to get the help of someone who has good credit and can guarantee to pay the loan if you can’t.

What will a debt consolidation loan look like on my credit report?

A debt consolidation loan will appear on your credit report like any other loan. Lenders can see that you’ve opened a loan account with your chosen lender and track your repayments.

They’ll also notice that you’ve used the loan to pay off your other loans or credit cards. If you close these accounts once repaid, they’ll be marked as closed on your report. Any missed repayments will remain on your credit report for up to six years, even after closing the account.

As long as you make timely repayments, having a debt consolidation loan on your report won’t hurt your credit or make lenders worry about you.

Which lenders offer debt consolidation loans for people with bad credit?

There is a list of top lenders in the UK that offer debt consolidation loans for people with bad credit:

Lending Expert: Offers debt consolidation loans up to £250,000 over 1-7 years. They also offer remortgages with terms of up to 35 years.
118 118 Money: Offers debt consolidation loans with a representative APR of 49.9% for individuals with bad credit.
Ocean Finance: Offers unsecured debt consolidation loans between £1,000 - £15,000 at an APR of 39.9% and secured loans up to £500,000 at an APR of 12.70% for up to 30 years.

Please remember that we’re not recommending any of these lenders. They charge high interest rates and plenty of fees and don’t necessarily offer the best terms. But if you’re really looking for a bad credit debt consolidation loan, they are some of the largest specialist direct lenders in the UK.

Can I get free debt consolidation?

In most cases, debt consolidation loans charge a setup fee. So, if you see any ad for “free” debt consolidation services, be careful. They might often come with hidden costs like higher interest charges. We’ve also read reports of companies that have also misled consumers by advertising “government debt consolidation loans”.

Should I get a debt consolidation loan if I have bad credit?

A debt consolidation loan can be great at helping you manage your debts better. Its main advantage is that it can help you stay on top of your many obligations so you don’t accidentally miss a payment by juggling multiple bills. This would hurt your score even more, and if you have bad credit, that’s the last thing you need.

However, a bad credit consolidation loan does come with high interest rates or even with the risk of losing your home. To improve your chances of getting a loan with a better rate and better terms without putting your home on the line, consider two things:

Getting a guarantor to vouch for you and pay your loan if you can’t.
Or improve your credit score and apply at a later point.

The second option is probably the best. Improving your credit score will allow you to get approved for the debt consolidation loan you want on the terms you want. You might also become eligible for things like 0% interest balance transfer cards, which can provide a further reprieve from interest charges and help you pay down debt faster.

One way to improve your credit score is by downloading a credit-building app like Wollit. Wollit is an app that reports a fixed fee monthly subscription as a loan repayment to the credit reference agencies (Experian, Equifax, and TransUnion). This allows you to build your credit history and allows you to improve your credit score over time, the first step towards getting a debt consolidation loan on much better terms in the future.