When debts are mounting, a debt consolidation loan can be a helpful way to regain control of your finances.
But what if you have a poor credit score? You might be wondering if you are able to get a debt consolidation loan.
Read on to learn about the options available to individuals in this situation.
Debt consolidation loans
A debt consolidation loan is one large loan, taken out to pay off two or more smaller debts.
When an individual is finding their debts unmanageable, a debt consolidation loan can make repaying debt easier, with only one periodic repayment, one interest rate and one set of fees.
If chosen wisely, a consolidation loan can also save you money along the way.
But what if I have a poor credit score?
As with all types of loans, obtaining a debt consolidation loan is going to be trickier if you have a poor credit score.
Having said that, it is rare that an individual is unable to obtain one. If your credit score is looking worse for wear, you may need to compromise on the type of loan and the loan terms.
There are two main types of debt consolidation loans available; secured and unsecured. A secured loan is lent against your assets, such as your home.
This makes the loan less risky for the lender, so you are more likely to be successful in getting a secured debt consolidation loan, even if your credit rating is low.
Unsecured loans are a bigger risk for lenders, and so they therefore rely on your credit score more heavily, to determine whether you are likely to be a reliable borrower.
You may still have success in obtaining an unsecured debt consolidation loan, but again, you may be up for a higher interest rate or less ideal loan terms.
In short, having a poor credit score is unlikely to affect you being approved for a debt consolidation loan, but it is likely to impact the type of loan, interest rate and other loan terms.
Alternatives to debt consolidation
If you find that the type of debt consolidation loan you are eligible to obtain isn’t suitable for your situation (for example, if the interest rate is too high to save you any money), you may want to consider an alternative form of debt relief. Here are a few:
Debt management plan: this is a type of credit counselling. A financial counsellor will contact your creditors on your behalf to reduce your interest rates, reduce your monthly payments and form a repayment plan for each of your debts.
Refinancing: refinancing involves reviewing your mortgage to incorporate your other debts.
This may reduce your interest rate but you may end up paying off your debt over a much longer term than your original debts, meaning that you end up paying more interest overall.
Debt Agreement: this option is available to low income earners who cannot repay all of their debts but want to avoid going bankrupt.
An administrator will negotiate on your behalf with your creditors on an amount you are able to repay.
It is important to be aware that Debt Agreements have serious long term implications, and is legally a form of bankruptcy.
How to get a debt consolidation loan
Begin by seeking free financial advice from a financial counsellor who can go over your unique situation and advise the best type of debt consolidation loan for you.
They will then be able to provide you with a range of loan options to help you regain control of your finances.
Once you’ve chosen your debt consolidation solution, your next step is to apply for a debt consolidation loan with your chosen provider and begin working to improve your financial situation.
