A debt consolidation loan is a personal loan that allows you to combine all your existing debts so you can pay them off once and for all. This makes payments easier because you are left with only one personal loan to be paid back over an extended period of time. It seems easy to consolidate outstanding debts, but it is not.
Here are some key considerations:
- In order to qualify for a consolidation loan, you must have a good credit rating. If your credit score is not up to scratch, you will most likely be turned down.
- Consolidation loans usually combine short-term high-cost debts such as payday loans, bad credit loans, and the like. If you are struggling to keep up with mortgage payments and other similar instalment loans, you will have to figure out another method to deal with them.
- If you are dealing with credit card debt, you will have to apply for a 0% balance transfer card.
- Most lenders feel disinclined to approve applications for large outstanding debts. It means, despite consolidation, you might have to deal with some of the loans separately.
There are some lenders that provide debt consolidation loans for bad credit in the UK, but they charge high interest rates. It is not always easy to qualify for a consolidation loan.
Reasons for being refused a consolidation loan
Here are some of the reasons why consolidation loans are turned down:
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What if you cannot get a consolidation loan?
As you know, there are several reasons for having your application rejected, the most common being the huge amount of debt. Consolidation does not reduce the amount of debt, but rather transfers it from one form of debt to another. Before, you had multiple debts to handle, but now you have only one large loan equivalent to the outstanding amount. After taking out a consolidation loan, you will have to pay down interest on top of that.
Not to mention, high interest rates will be charged as there is a huge risk of default. Your income might not be enough to deal with the obligation. If you have been rejected for a consolidated loan for any reason, you should consider the following alternatives:
- A debt management plan
While a consolidation loan requires you to take out a new loan to pay off your existing debts, a debt management plan involves structured payments administered by a credit counselling agency. Based on your current financial condition, a repayment plan is proposed to lighten the burden of debt on you.
You are responsible for making a single payment to a credit counselling agency, which will distribute the money among your creditors. Unlike consolidation loans, this includes credit card debt, too.
The repayment plan lasts between three and five years. The agency may negotiate for lower interest rates and fees, but you will be accountable for paying the whole debt.
Pros and cons of debt management plan:
| Pros | Cons |
| It does not damage your credit score for a very long period of time, as in the case of debt settlement and bankruptcy. | You will have to close your credit card accounts, and this will increase the risk of a credit utilisation ratio. |
| You can save a lot of money if interest rates become lower. Managing payments is easier as the whole cost of the debt is spread over time. | You cannot take out a new loan or open a new credit card account as long as you are on a debt management plan. Lenders will most likely reject your application. |
| Credit cards are required to be paid off in one fell swoop, but with a debt management plan, you can pay them off under extended repayment terms. | A debt management plan might not be inexpensive. |
- Debt settlement
Debt settlement is confused with a debt management plan, but this is entirely a different process. This involves negotiating with your creditors to pay less than the amount you owe. You can do it on your own or with the agency of a debt settlement company.
Since this process involves convincing lenders to accept less than you actually owe, you will be required to discharge the whole debt in a lump sum once and for all. It is vital to bear in mind that a debt settlement firm will cost you fees ranging between 15% and 25%.
Here are the upsides and downsides of debt settlement:
| Upsides | Downsides |
| Debt settlement can help you get out of debt when a debt consolidation and debt management plan are not feasible. | If you fail to repay your debt, late payment fees will be added. The amount that is waived off will be regarded as your income. you will have to pay tax on it. |
| It helps you avoid bankruptcy, which can badly ruin your credit score. | Debt settlement can devastate your credit score, as this will remain recorded on your credit file for seven years. |
| Debt settlement can help you avoid a lawsuit. | There is no guarantee that it will work. It depends on lenders whether they will be willing to accept less than you owe. |
The final word
If you fail to qualify for a consolidation loan, you should consider a debt management plan and debt settlement. If you cannot qualify for these alternatives, too, you should consider a less common but extremely risky option, which is called releasing equity from your home and using it to pay off your debt. If nothing works, file for bankruptcy. However, this is a last resort.
