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How to Get a Debt Consolidation Loan while Having Bad Credit

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Debt consolidation can offer significant relief to homeowners grappling with multiple high-interest debts such as credit cards and personal loans. By combining these debts into a single, manageable loan, you can simplify your financial life and potentially lower your overall interest rate. However, securing a debt consolidation loan with bad credit can be both risky and challenging. Here’s a comprehensive guide to help homeowners navigate this process.

Understanding Debt Consolidation Loans 

A debt consolidation loan is a type of financing that merges multiple debts into a single loan with one monthly payment, often called a debt consolidation remortgage. The goal is to reduce the interest rate and streamline the repayment process. Homeowners have unique advantages and options when it comes to securing these loans, even with bad credit mortgages

Evaluate Your Financial Situation 

Start by taking a thorough inventory of your financial situation. List all your debts, including credit cards, personal loans, and other liabilities. Note the balance, interest rate, and monthly payment for each debt. Also, calculate your monthly income and expenses to determine how much you can afford to pay toward the loan each month.

If you have zero interest credit cards, it will be worth considering not including these in your debt consolidation loan with a view to get them repaid during the introductory period of no interest.

If you are a homeowner, it is recommended that you explore all unsecured ways to consolidate your debts ahead of considering a mortgage. These include personal loans and low interest rate credit cards.

If you are a more mature homeowner, do not worry as we have a large selection of debt consolidation solutions mortgages for the over 50s available. 

Check Your Credit Report 

Your credit score is a critical factor in determining your eligibility for a debt consolidation loan. Obtain a free copy of your credit report from each of the three major credit reference companies, we offer an affiliate to help our customers with this, click here for more information.

Check your report for errors or inaccuracies that could be negatively affecting your score and dispute any discrepancies. 

Explore Loan Options for Homeowners 

Homeowners have several specific options when it comes to debt consolidation loans, even with bad credit.  All the options below will be available if you have bad credit registered against you, whether you will be accepted will depend on what has been registered, how much it was for, the dates, and whether the bad credit is now settled. Bad credit examples include a CCJ, Missed payments, defaults, poor credit score etc.

Secured loan mortgages: A secured loan, or often known as a homeowner loan, uses the equity in your home as collateral. Since these loans are secured, they often come with lower interest rates compared to unsecured loans. However, failure to repay can put your home at risk.

Further advance mortgage: This involves refinancing your existing mortgage for more than you currently owe and taking the difference in cash. This cash can then be used to pay off your debts. While this option can lower your overall interest rate, it extends your mortgage term, which means you’ll pay more interest over time. You will then have two mortgages with the same lender with different rates and terms etc.

Debt consolidation remortgage: These involve moving your existing mortgage to a new lender along with borrowing additional money to repay your debts. Your new mortgage balance and payment will be larger than your current one due to the additional borrowing.  

Gather Necessary Documentation 

To support your debt consolidation application, you will need to prepare the necessary documentation. This typically includes: 

Having these documents ready can expedite the application process. Documents will be required for all product types. 

The Importance of Mortgage Advice 

A debt consolidation mortgage loan is a high-risk lending area, and you should think carefully about taking currently unsecured debts and securing these against your home.

Once secured, in the event of non-payment, your home is at risk of repossession by your lender, and you could become homeless.

Independent mortgage advice should be taken, and your advisor will then make a personalised recommendation.  Our mortgage advisors are experienced and knowledgeable in debt consolidation remortgage advice and have your best interests at heart.

Another thing to consider ahead of a debt consolidation loan is the amount of interest you will pay over the lifetime of the mortgage, the rate may be lower however, the amount could be more as it will be over a longer number of years. 


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About the Author

Malcolm Davidson

Managing Director of UK Moneyman LTD

Malcolm is one of the UK’s most well-known and respected Mortgage Advisors. He is passionate about providing a 5* customer experience and he has also trained and mentored dozens of fellow Advisors in a career that is now in its third decade.

In addition to his day to day duties as Managing Director, Malcolm still gives out mortgage advice and feels lucky that his job is also very much his hobby.

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