Debt consolidation loans for those with bad credit
Are debt consolidation loans a good solution for people with bad credit? Managing debt can be tricky, especially if you owe money to multiple businesses or credit cards at once. It’s all-too-easy to get into a spiral of debt, with interest payments increasing as your credit score takes a tumble.
Debt consolidation loans are one tool that people with bad credit can use to start to get back on an even keel. Like all forms of borrowing, debt consolidation loans are not without risks. Used smartly and strategically, though, you can greatly reduce the stress of managing your finances and move towards paying off your debts in a timely fashion.
What is a debt consolidation loan?
A debt consolidation loan is a financial product that allows you to combine multiple debts into a single loan. Ideally, this loan will be at a lower interest rate than you are paying on your existing debts. In that case, taking out a debt consolidation loan will not only simplify the management of your debts into a single monthly repayment, but potentially save you money in the process. When you take out a debt consolidation loan, you borrow a lump sum from a new lender that is used to pay off your existing debts. You are essentially taking on a new debt with a new lender, but you now have just one debt to manage instead of multiple ones.
What are the benefits of a debt consolidation loan for people with bad credit?
If you have a low credit rating, credit card companies may see you as a high-risk borrower, and may restrict the types of credit they will offer you. A debt consolidation loan is one tool that people with bad credit can turn to that may help boost their credit score as well as pay off debts.
Simplified debt management
With a debt consolidation loan, you now only need to focus on one monthly payment. Keeping track of multiple repayments with different due dates and interest rates can be tricky and can even lead to missed payments if you get overwhelmed.
Curve is another helpful way of managing multiple credit cards and repayments. It's a digital wallet with a flexible credit line built in – ready to use if and when you need it. By adding your debit cards and credit cards to your Curve wallet, you can easily keep track of all your finances in one place with an at-a-glance overview. More interestingly though, Curve gives you the unique power to Go Back in Time® and switch old payments from one card to an other. That means if you're not going to cover your full credit card balance on any particular month, you can move transactions to another credit card to give yourself an extra 30 days to pay.
Download Curve Wallet to give yourself a financial safety net when you're about to incur credit card interest or overdraft fees.
Lower interest rates
Depending on the interest rates you’re currently paying on existing debts, you may be able to get a better rate with a debt consolidation loan. Some cards, like balance transfer cards, may offer a low-interest rate that spikes after a set period of time. If you’re hitting the end of that low-interest period, then a debt consolidation loan can move that balance back towards a potentially-lower rate.
Improved credit score
By consolidating your debt and keeping on top of your new monthly repayments, your credit score will automatically improve. As a debt consolidation loan often leads to lower monthly payments, and simplifies things to help consumers avoid missed payments, it can put you in a stronger position to build a positive credit history.
Fixed repayments
Lots of debt consolidation loans come with fixed repayment terms, so you’ll know exactly how much you’ll need to pay each month. Stability like this can be a huge help in staying on top of your budgets and making sure you don’t miss any further payments.
What are the disadvantages of a debt consolidation loan for people with bad credit?
While debt consolidation loans can be a useful tool for those with bad credit, they do also come with drawbacks that should be carefully considered before taking out such a loan:
Bad credit can lead to higher interest rates
In virtually every form of borrowing, bad credit will lead to lenders offering you a higher interest rate than someone with a good credit history. So although a debt consolidation loan will undoubtedly simplify your finances and can help you stay on top of payments, you may also end up paying more to clear those debts in the long term. Make sure you carefully weigh up the overall cost to you before you commit.
Fees and charges
Some lenders may charge up-front fees for debt consolidation loans. Others will have additional charges like early repayment penalties, hitting you with a fee if you find yourself willing and able to clear a chunk of your debt earlier than you originally intended. These terms will all be available up front before you take out the loan, so make sure you’ve fully understood the small print before proceeding.
Secured loans may put assets at risk
Some debt consolidation loans, particularly for those with bad credit, are secured loans. That means they’re backed by assets such as your car or your home. Missing a payment on a secured debt consolidation loan therefore means you could risk losing those assets, and can make these loans even riskier if you’re already in a complicated financial situation.
Getting the most out of debt consolidation loans with Curve
While debt consolidation loans can be an effective way to manage and simplify debt, you can amplify these benefits even further with Curve. Curve allows you to link multiple debit cards credit cards to one digital wallet so you can see all your credit card balances in one place at a glance, you can keep track of your spending with smart insights, and you can even move your credit card balances to another credit card to consolidate your debt onto one card.
This gives you the option of moving balances away from high-interest credit cards and can help avoid spiralling debt. Using Curve to consolidate debt and lower your borrowing costs can be a lot cheaper than balance transfers, with a 1.5% fee compared to the standard 3% fee on balance transfer cards.
A debt consolidation loan can be a powerful tool for those with bad credit looking to manage multiple debts. By simplifying repayment schedules at potentially lower rates, you can reduce the risk of missed payments and boost your credit score. Those loans, though, are not without their inherent risks and drawbacks. Make sure you’ve carefully weighed up whether this is the right option for you, and considered alternatives like Curve that may achieve your goal of financial stability without taking out another loan to a new provider.
