Can you consolidate your loans if you have bad credit?


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Are you feeling overwhelmed by having different debts in different places, and on top, have a bad credit history? Don’t worry, you’re not the only one out there like this!

According to the new research conducted from ING, 37% of debt-laden Aussies said they didn't know what to do to manage their debts, while 38% are concerned they'll never get rid of it. And the worst nightmare? - 60% of respondents said they had never considered debt consolidation as a solution.

So, now the two most tricky questions to focus on are: should you consolidate your debt? And can you consolidate your debts with a bad credit history? Let's find out what, why, how, which, and when rolling your stubborn debts into one low-interest loan is really worth the try…...Even if it means with a bad credit history!

What is a bad credit debt consolidation loan?

Having to deal with multiple debts can literally feel like you’re playing a game of Tom and Jerry. We get it! That is why debt consolidation, or bad credit debt consolidation, may be helpful in rolling several debts, typically the high-interest ones such as credit card bills, into a one simple loan.

The advantages? Doing  so can reduce your multiple monthly payments to one regular repayment date and provide near-term relief. Meaning, there will no longer be different bills with different due dates to remember with corresponding penalties if you pay up late. However, debt consolidation might be a good idea only if you can get a lower interest rate. It's because a lengthier term could also mean paying more in total interest. But this doesn’t mean more than paying interest rates individually on each regular loan.

Nonetheless, you are consolidating all debts into one, so you might be able to reduce your overall total debt, including your solitary loans. That way, you can still reorganise it to pay it off faster, and thus save on fees, time, and of course, your stress.

The second benefit is that when you pay out your debts, they will show up as “paid” on your credit report, and if you stick to the repayments, they can help improve your credit score. Meaning, you can get back in control of your multiple high-interest or high fee charges..

Other obvious benefits include:

  • Positive effect on an individual’s credit rating once the multiple debts are settled.
  • Simplified tracking - fixed & lower monthly repayments, less interest, fees, and late charges.
  • Reduced interest rate and payout than most credit cards
  • Easier to manage and quicker way to become debt-free

What types of debt to consolidate?

Generally speaking, the common types of debt to consolidate include but are not limited to:

  • Credit card balances
  • Student loans
  • Payday loans
  • Car loans
  • Income taxes
  • Medical bills
  • Utility bills
  • Unsecured personal loans, and
  • Personal lines of credit

Note: A borrower may also consolidate loans or credit lines that are not secured by a home or otherwise collateralised.

Can I get a debt consolidation loan with bad credit?

If you have poor credit, your ability to obtain a loan is incredibly remote and often not possible. Not saying it’s impossible! You might still get a loan, but it comes with a price as the terms of your loan will be impacted by your credit rating, which in turn can affect:

  • Limited options - the type of loan you are eligible for
  • Interest - the interest rates available
  • Amount - the amount you can or is allowed to borrow and
  • Duration - the period of time in which you have to pay off the loan.

As your bad credit rating indicates a risk to lenders, you may be charged a higher interest rate than borrowers with good credit scores, and also, that means the lender may favour a secured loan over an unsecured loan.

How to get a debt consolidation with bad credit?

With debt spiralling out of control; you may need more money to pay it off, but your bad credit rating will make it harder to gain access to the finance you need from traditional banks. That is why this section contains 6 easy-to-follow steps with high probable of getting a debt consolidation with bad credit.

1. Check and monitor your credit score for free

Before you apply for a debt consolidation loan, check and monitor your credit score for free on any trusted sites, including WeMoney.

2. Wait and improve your credit if necessary

Finding a perfect consolidation loan to get rid of your financial burden can take time and often can be a tough choice to select. If you tried everything and can’t find a loan that you desire. Don’t worry and most importantly don't think of rushing your decision that you need a loan right now. Instead, maybe the best you could do in handling situations like this is to hold off and take some time to establish a better credit score. For example, you can focus on paying your next bills on time, keeping current accounts open and limiting hard inquiries on your credit report. Also make sure to check whether any of your personal details are incorrect on your credit report and avoid them as much as possible.

3. Take your time to find a lender who can approve you

Again, applying for a loan with bad credit is never an easy decision to make. Take your time to do ample research and compare loan amounts, repayment terms and fees from multiple sources, such as local banks, national banks, credit unions and online lenders. Also, find out which lender can help you get the lowest debt consolidation rate even with a low credit score. You might not get the same lower rate as those with perfect or good credit scores but it doesn't limit your ability and rights to get the best out of the limited options available for your credit score. So make sure to follow the above criteria that are important for lenders’ approval before taking a step forward to apply for a loan. Plus, you could also follow the debt avalanche method to clear your debts. This method involves making minimum monthly payments on all your debts but then using any remaining money to pay off the debt with the highest interest rate until it’s gone.   This process can take time, but it might save you a lot of money.

4. Choose a secured loan

Secured personal loans may be more accessible especially for people with bad credit or a low credit score simply because they lessen the lenders’ risk and frequently include lower rates of interest. Those without home equity or any other collateral that is valuable can be better offered by having someone with a better credit guarantor regarding the consolidation loan. If having secured loan or co-signer on the loan just isn’t feasible, borrowers with bad credit can focus their energies on do-it-yourself fixes. For example, by making use of the debt snowball method. However, if your score is good enough to qualify for an unsecured loan, it’s best not to pledge collateral unless you’re super duper confident in your ability to make on-time payments.

Note: Only if you trigger a default situation (which is very specific from lender to lender) or don't meet the terms of and conditions of the loan - simply falling behind on repayments does not mean you'll lose your asset - feels excessive. The typical period is 90 days or some up to 180 days. To learn more about secured and unsecured personal loans, read our full article here.

5. Find a guarantor

Likewise, loan candidates with bad credit in some cases could apply for a contractual agreement with another borrower with a strong credit score to increase the chances of loan approval from credit providers. Which means that in the event that the borrower with bad credit does not make repayments regarding the consolidation loan, the co-signer is supposed to be on the hook when it comes to the balance that is outstanding. In simple terms, lenders try to find co-signers who possess good or excellent credit for the most obvious reason; they have sufficient earnings to pay for repayments in the guarantor loan.

Note: Keep in mind that if the guarantor arrangement doesn’t work out, you could severely damage your credit as well as your relationship with the borrower. So unless you can be 100% sure about someone in your immediate family or some type of beneficial ownership to go as guarantor, entering into a co-signing arrangement is risky and we do not recommend it.

6. Do-it-yourself fixes

The good news is, you might also be able to alter your financial plan without seeking help from third parties. Here are a few ways for you to potentially start attacking your debt to death:

Overhaul your budget - Compare how much you’re spending with how much you earn and see where you can cut costs to free up more money for debt elimination. You can use our WeMoney app, which also allows automatic calculation of your assets minus liabilities using our net worth feature so that you can see how much you own versus how much you owe. Moreover, you can get insights into your monthly spending and saving habits to understand where your money is going and how to manage it better. This way, we can help you regain control of your financial situation and achieve any meaningful money goals you have.

Find a win-win in terms of your debt - If you’re struggling to meet your minimum payments, try to renegotiate with your lenders. You never know! They might be even willing to lower your interest rate or work with you in other ways.

Request for a due-date adjustment - You might be able to schedule all of your payment due dates near the same day. While this isn’t the same as consolidating your debt, it may help you keep track of your obligations more easily. Again you can give our WeMoney app a shot if you haven’t already as you can set payday + track your bills or any transactions by securely linking multiple accounts to get a complete 360 view of your finances.

What are my chances of getting rejected for debt consolidation with bad credit?

Well, it depends entirely on the discretion of the bank or lender. In other words, you are more likely to be rejected for a debt consolidation loan if you have a bad credit score. The obvious reason is that lenders will assess your creditworthiness basing their decisions on whether you have a history of late payments, multiple defaults, or are unemployed or not in regular employment. So if you fit one or more of the above criteria or your debt situation has gotten out of control, you are unlikely to be eligible. Different lenders may have different internal credit yardsticks to evaluate your credit performance, so you can’t really tell with certainty that if one lender rejects, all others will and vice versa. The worst-case scenario is when you have been rejected before and are unable to reach a mutual understanding and arrangement with your creditors.

How about debt consolidation alternatives for bad credit?

Be it you have bad credit or not, we live in a world where there is always one or another option open for you. It’s just a matter of finding the right one for you.  The following is a list of potential alternatives besides debt consolidation loans that could help you get rid of debt off your shoulders and get on with life.

Let’s start first with how you can finance your money using home equity loans.

So, there are altogether three ways you can do that:

1. Home Equity Loan

Sometimes called a second mortgage,  a home equity loan is a lump-sum loan where homeowners can use equity in their home as collateral for a loan.

Note:  Loans can be variable or fixed - 80% of Australians take out a variable rate loan. Also, fixed-rate loan people can rarely make repayments greater than $20k in additional so it might be counterproductive to efforts to get out of debt.

2. Home equity line of credit (HELOC)

This is another type of financing that is secured by the value of your home. Unlike the first one, you don't need to borrow a lump sum at a fixed interest rate, you can just take out a line of credit — similar to a credit card. Why should you do that? Because this gives you access to funds whenever you need them, up to a maximum borrowing limit. As you pay down your balance, you can borrow up to that limit again.

Note: due to a bad credit score, borrowing limits might be lower than a standard max borrowing limit.  

3. Cash-out refinance

With this method, you can take out a new mortgage or top up an existing mortgage. From there, you can use the leftover funds to pay off your debt.

Other equally important options include:

4. A debt assessment

There are many experienced debt negotiators to help people with bad credit find their way back to financial freedom. How? They start by offering you a free, impartial debt assessment in which they get to know and understand your personal circumstances to come up with a debt management plan perfectly suited to your financial needs.

5. Consider a fuss free loan

WeMoney can help! We recently partnered with multi-award winning personal finance and home loan providers to potentially save you some serious $$$.

NOW Finance, for instance, is an  Australia leading go-to personal loan provider that offer a range of attractive loan products (home loans, personal loans, car loans, and much more) with extremely competitive rates starting as low as 6.95% (comparison rate 6.95%)*  for Excellent Credit. If you are keen to explore it or our other credit products, you can get your personalised rate with  NOW Finance without impacting your credit file.

6. Credit card balance transfer

Let’s say you are carrying credit card debt that is attracting a high interest rate. Choosing this method  may benefit you as you can transfer all of the outstanding debt to a new credit card that offers a 0% p.a. interest rate on balance transfers for a certain amount of time. That means, by combining  multiple card debts into one credit card, you can get up to 80% of the approved limit, allowing you to get ahead of your debt without paying interest for the promotional period, also known as the honeymoon period.

Note that the 0% p.a. interest free rate will only apply for a limited time period, which is usually around 24 to 26 months. This sets a clear timeframe for when you should have the debt repaid. After this time the standard annual purchase rate usually applies to the remaining debt. Of course, the terms, conditions and fees associated with each balance transfer offer are different so you should make sure you check out the details for the particular offer you want to take up.

7. Credit counselling

If you’re struggling to manage your debt, credit counselors can also set you up with a debt management plan. Credit counselling agencies typically have contracts with creditors with lower interest rates than what you may be currently paying. Therefore, credit counselling agencies can help by acting as a middleman between you and your creditors.

8. Bankruptcy

If you’re experiencing financial hardship and even debt settlement doesn’t sound possible, bankruptcy may be your last resort. Depending on the type of bankruptcy you file, you may need to place your assets under control of a bankruptcy court and agree to give up most or all of your wealth.

9. A Part IX (9) Debt Agreement

This agreement may be a suitable alternative to bankruptcy. Why? Because it’s based on what you can afford – not what you owed. It uses part IX of the Bankruptcy Act to freeze the outstanding balance of your debts and stop any further interest, fees or charges. So this by far will be your best bet if none of the above options works in your favour.

Which debt consolidation loan is right for me?

As mentioned earlier, getting a debt consolidation loan is really a great method if you want to simplify your monthly payments and minimise overall interest charges. However, for borrowers with poor credit, inconsistent earnings or poor spending habits, a debt consolidation loan may not be the best answer.

Debt consolidation might be right for you if:

✔️Your credit score is high enough to qualify for a low-interest loan

✔️You have got sufficient house equity to utilise your house as collateral for a secured loan.

✔️ Your monthly debt service totals 40% or less of your monthly income

✔️ You are already taking steps to improve your finances and reduce spending

✔️ Your monthly cash flow consistently exceeds your monthly debt payments

Closing tip: watch out for predatory lenders

IIf you’re considering a debt consolidation loan with a bad credit, be mindful that some lenders are predatory in nature. This is especially true of lenders that work with people who have bad credit history. Often they might take advantage of you by charging you exorbitantly high interest rates and a variety of additional fees.

Look out for the following warning signs:

  • The lender is rushing you to act quickly.
  • The interest for your credit rating seems too good to be true.
  • The lender is rushing your transaction
  • The lender is telling you to sign on a blank document or on the one with incomplete information on loan costs and the interest rate.
  • The lender is pressuring you to take out a risky or expensive loan.
  • The lender is asking you to lie about your details on your application.
  • The fees or terms suddenly change or are not mentioned at closing.

If you’re looking to learn more about what the four most common debt traps are that people fall into listen to our full podcast here (as they aren’t what you’d expect!).

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

Things you should know

Applications for finance are subject to Now Finance’s lending and approval criteria. Terms and conditions may apply. No establishment, account keeping or early repayment fees will apply to all new personal loans. Charges such as default or enforcement costs may apply if you do not comply with the terms of your loan. Settlement times may vary depending on individual circumstances. Loan repayment terms range between 18 months to 7 years with interest rates ranging from 6.95% p.a. (6.95% p.a. comparison rate*) to 17.95% p.a. (17.95% p.a. comparison rate*).

About Comparison Rates

The Comparison Rate is designed to help you understand the overall cost of the personal loan. It combines the amount of the loan, loan term, repayment frequency, interest rate, fees and charges into a single rate to show the total true cost of the loan. The comparison rates for the Now Finance loans are based on a loan of $30,000 over 5 years.

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