Check your credit score today.

See your credit score in minutes. It's free, forever.

See your score

Debt Consolidation Loans for Bad CreditL How does it work?

Struggling with debt and a bad credit score? Find out everything you need to know about consolidation loans and if it's right for you.

12 December 2022Lloyd Smith 5 min read
Consolidation Loans for Bad Credit - How do they work?

Check your credit score today.

See your credit score in minutes. It's free, forever.

See your score

Managing multiple debt repayments can be a nightmare for anyone who already has several high-interest loans. In such cases, borrowing a debt consolidation loan can be incredibly helpful for consolidating loans into one payment.

It can be especially useful to consolidate loans when you have bad credit as debt consolidation can help you to simplify your repayments to pay off your dues quickly and improve your credit score as well.

This guide tells you everything you need to know about debt consolidation in Australia :

Debt consolidation or consolidation of debt is a method of refinancing old debts that carry very high interest. You can combine or roll over multiple debts into a single debt and repay it on more favourable payment terms.

A debt consolidation loan is a personal loan that you can borrow for consolidating and paying off your old debts.

You can approach banks, credit card companies, credit unions, or financial institutions to apply for a debt consolidated loan. Usually, such loans offer a better interest rate or reduced instalment amounts, or both, making it an attractive option for those struggling to keep up with multiple debt repayment schedules. This helps you to pay off your debt consistently which in turn boosts your credit score.

You can opt for either unsecured or secured debt consolidation loans:

  • Secured loans: For secured loans, you need to offer an asset as collateral for the loan that the lender can use in the event of non-payment. These loans are the easiest debt consolidation loans to get.

  • Unsecured loans: These loans do not require any collateral. Consequently, they are harder to get and also carry higher interest rates.

Before understanding how debt consolidation for bad credit works, let’s look at the relationship between bad credit and multiple debts.

It is not unusual for borrowers with multiple debts to miss their existing loan repayments, resulting in a bad credit score. This can result in a tricky situation -- since debt consolidation loans are like any other personal loans, the lender checks your credit score to determine your creditworthiness. On average, lenders usually expect a credit score of around 650 to extend a debt consolidation loan. But when you have a poor credit rating, getting the loan approval can be an issue.

That’s where debt consolidation loans for bad credit come in handy. The minimum acceptable credit score for lenders offering debt consolidation loans with bad credit varies. However, offering collateral can make it easier for borrowers to get approved for such loans easily.

Usually, the interest rate of a bad credit debt consolidation loan may be higher than a regular consolidation loan. Even then, it can potentially help you save as the combined rate of your present debts may still be significantly more than the new interest payable.

Like any other credit product, you will need to apply for a debt consolidation loan by filling up an application form. For most lenders, the standard eligibility criteria of an applicant are as follows:

  • be 18 years or older,
  • either be a citizen or hold proof of permanent residency; and
  • have a source of income

Apart from your application, the lender will also review the information in your credit report and then decide whether to give you a loan and on what terms. Bear in mind that the exact requirements and process vary depending on which lender you approach.

Securing consolidation loans for bad credit can be an uphill battle for many. Here’s what you can do to boost your chances of getting approved:

Know your credit score before you apply

Lenders providing such loans still need to look at your credit score before deciding. The lower your score, the higher the interest charged. Knowing your score will make it easier to shortlist suitable lenders and secure a loan quickly.

Don’t settle for the first lender who makes an offer

You may be in a tough spot managing multiple debt payments. Still, there’s no reason to accept the first offer you get. Get offers from various lenders and compare their terms, especially interest, fees, and repayment amounts.

After all, consolidating debts should help you save money and not spend more.

Opt for a secured loan

To improve your odds, consider getting a secured debt consolidation loan. It is easier to get approved for a secured loan than an unsecured one, even with poor credit.

Depending on the value of your collateral, the lender may also offer you a better interest rate.

Try to improve your credit score and then apply

If you are absolutely unable to secure a good offer, start creating a short-term plan to improve your credit score. Cut down on non-essential expenditures to use the available funds for paying down the dues. Consistent payments will help you to improve your current score and negotiate better terms with the lender.

Moreover, you will come across as a more responsible borrower who has already taken the necessary steps to avoid falling into a debt trap.

Approach a credit union

Sometimes you may find it easier to borrow consolidation loans in Australia from local financial institutions or credit unions instead of approaching banks. These lenders may offer you better terms even when you have bad credit, especially if you have a pre-existing relationship with them. They may consider your entire financial history, circumstances, current source of income, and your institutional relationship before deciding on your loan application.

If you still cannot find a suitable lender, explore whether any payday lenders are providing no credit check debt consolidation loans. These lenders do not perform any credit checks to approve financing. They only conduct soft inquiries to obtain background information. But beware -- the interest rates are often sky-high as the absence of credit score and credit history makes the lending riskier.

Initially, loan consolidation may impact your score adversely. When you close all your old accounts suddenly and open a single one, the length of your credit history reduces, bringing down your score. Moreover, every time you apply for a bad credit debt consolidation loan and the credit provider runs a credit check, it shows up on your credit file as a hard inquiry. Hard inquiries impact credit scores.

But debt consolidation helps you in the long run if you don’t miss your payments and don’t apply for new credit unnecessarily. Regular payments improve your payment track record, which, in turn, boosts your credit score. Additionally, since you pay lesser interest, it gives you the freedom to pay larger instalments and pay off the debt quicker. This can positively impact your score.

Ideally, your credit score should be 650 or at least in the mid-600 range. However, some lenders may even accept lower scores of 580 or below.

It is best to know the credit score requirement of each lender before you apply for a debt consolidation loan.

Credit card balance transfer is a method of debt consolidation. However, it is only available for debts due on credit cards. You can consolidate and transfer such debts to a single credit card. You can benefit by paying off your debt during the promotional period when the interest is usually zero or very low.

On the other hand, there is no interest-free period when you opt for debt consolidation through a loan. And unlike credit card balance transfer, the interest rate remains the same throughout the term of the loan.

Choosing between debt consolidation through loans and credit card balance transfer depends on your circumstance. If you have multiple high-interest debts, such as payday loans that are not linked to credit cards, opting for a debt consolidation loan is the best option. If you only have credit card dues that you want to consolidate, you should compare the terms of credit card balance transfer and debt consolidation loan and decide.

To sum up, debt consolidation is about borrowing loans to pay off loans. It can be a boon if you are struggling with numerous high-interest debts. Even if you have bad credit, you can avail of such a loan to repay your dues.

Knowing your credit score is the first step to getting such a loan. With ClearScore, you can check your credit score for free anytime you want.

Lloyd Smith Image

Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.