What is debt consolidation?
Debt consolidation is the process of rolling several old debts into one new debt – usually to save money or for the sake of convenience.
In some instances, debt consolidation can help borrowers reduce their repayments or simplify them. For example, someone might take out a $7,000 personal loan at an interest rate of 8 per cent so they can repay a (different) $4,000 personal loan at 10 per cent and a $3,000 credit card loan at 15 per cent.
However, debt consolidation can backfire if the borrower spends the extra money instead of using it to repay the new loan.
Generally, bad credit personal loans can be used for one or more of the following purposes:
- Debt consolidation
- Paying bills
- Buying vehicles
- Moving expenses
Some lenders restrict how their bad credit personal loans can be used as part of their commitment to responsible lending – be sure to check before applying.
The worse your credit history, the harder you will find it to consolidate your debts, because lenders will be less willing to lend you money and will charge you higher interest rates.
However, people with bad credit histories can make debt consolidation work by following this three-step process. First, find a lender willing to give you a bad credit personal loan – this process will be simplified if you go through a mortgage broker or use a comparison website like RateCity. Second, make sure the interest repayments on your new loan are less than the repayments on the loans being replaced. Third, instead of spending those savings, use them to repay the new loan.
If you receive a financial windfall (e.g. tax refund, inheritance, bonus), using some of this money to pay extra onto your personal loan or medium amount loan could bring you benefits, such as reducing the total interest you’re charged on your loan, or clearing your debt ahead of schedule.
Check your loan’s terms and conditions before putting extra onto your loan, as some lenders charge fees for making extra repayments, or early exit fees for clearing your debt ahead of the agreed term.
In some instances, bad credit personal loans can help people with bad credit history to consolidate their debts in such a way that it makes it easier for them to repay those debts. This is because the borrower might be able to consolidate several debts with higher interest rates (such as credit card loans) into one single debt with a lower interest rate.
However, this strategy can backfire if the borrower spends the extra money instead of using it to repay the new loan. Another disadvantage of bad credit personal loans is that they have higher interest rates than regular personal loans.