Debt Consolidation Loans: What Credit Score Do I Need?

Debt Consolidation Loans: What Credit Score Do I Need?

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Debt is an inevitable part of our financial lives. While we responsibly use managed debt to build assets, accomplish life goals and financial milestones, unmanaged debt can disrupt your financial peace.

It is crucial to plan a strategy to efficiently deal with your unorganised debt to improve your overall financial health. Debt consolidation loans can help you take on your debt pile without breaking your bank.

You can organise your finances with a debt consolidation loan and pay affordable monthly instalments each month over a fixed repayment period. But what credit score does one need to get a debt consolidation loan? Read on to find out!

How do debt consolidation loans work?

A debt consolidations loan is a single loan that you can use to settle your ongoing debt obligation – high-interest balances, credit card debts, unplanned medical bills, etc. You essentially combine your ongoing debts into a single loan, which you can then repay over affordable monthly instalments.

Debt consolidation loans are an effective way to unclutter your finances. If you find a debt consolidation loan with a lower interest than all your debts combines, it could help you save load on interest. Plus, the new loan may have a shorter repayment period than your ongoing debts, expediting your payoff.

You can easily find a debt consolidation loan with an online broker or lender. Loan Broker is an FCA-approved broker that can help you find your ideal debt consolidation from the comfort of your home. Compare personalised loan offers from multiple lenders online to find suitable offers.

Once you qualify, lenders would normally disburse the funds into your bank account. You can then use the money to settle your outstanding debts. Some lenders go the extra mile and pay the funds directly to your creditors. Now, you will only have to pay towards your debt consolidation loan, typically lasting for a span of 2 – 7 years.

Personal loans for debt consolidation are only one of the many debt management strategies. This method may not work out for you if you have excessive debt or are struggling with underlying spending issues.

There are many benefits to using a debt consolidation loan to tidy up your finances, some of which are listed below:

  • Ease of repayment: Debt consolidation bears off the pain of traversing through different statements and juggling multiple repayments on different dates. All you need to do is pay towards a single loan on the same date each month.
  • Clarity and perspective: When you combine your debts into a single loan, it is much easier to track your loan’s balance, how fast you’re repaying it and at what interest.
  • Potentially lower interest rates: Timely repayments over a prolonged period can improve your credit score. This way, you may find a loan with an interest rate lower than all of your ongoing loans combined, consequently lowering the cost of your loan.

When to consider debt consolidation loans (UK)?

Using a debt consolidation loan makes more sense if:

  • you don’t end up spending a fortune paying off any fees or charges
  • you can afford to keep up with repayments until the loan is settled
  • you work on your spending habits and resolve to stay on the right track
  • the interest on the new loan is less than the interest on your ongoing debts
  • The repayment term for the new loan isn’t unnecessarily long – The longer your loan has a balance, the longer you’ll have to keep paying interest on it.

Low-interest debt consolidation: What credit score do I need?

The lending criteria for personal loans can vary among different lenders. Lenders primarily assess your application based on your credit standing and ongoing financial circumstances – credit score, income, credit utilisation, and debt-to-income ratio to determine your repayment capability.

There may not be a discrete value that lenders look for, but having a credit score classed as good can certainly aid your application. Since different CRAs use different scoring models, what’s considered ‘good’ may vary among each of them.

Although, most lenders consider a score of 650 as the benchmark. A score of 650 or above could fetch you offers with competitive interest rates. The offers get better as your credit score improves – the higher your score, the lower the interest rates.

Many lenders cater to borrowers with a low credit rating (usually lower than 600 points). However, the interest rates on these offers are often higher. Lenders counterweigh a high-risk proposition by setting higher interest rates for low credit borrowers.

A lender’s decision to grant credit primarily relies on the condition of your credit. As per the rule of thumb, low credit borrowers get offers with higher interest rates, curtailed borrowing limits and potentially, shorter repayment terms.

But it is important to remember that to reach the approval stage; one needs to qualify as an applicant – meet the minimum set of requirements. Most lenders set a credit score eligibility ranging in the mid-600s. Some lenders catering to a range of low credit consumers might accept scores as low as 580.

A good way to start your loan search would be to check and monitor your credit score regularly. If you know your credit score, it’ll be easier for you to identify potential lenders. Most lenders clearly state eligibility criteria on their web portals.

Although, Loan Broker could save you this additional step. Compare from a variety of personalised loan offers from multiple lenders and find your ideal loan online, from the comfort of your home.

How to manage my personal loan consolidation?

  • Use budgeting: A budget helps you allocate money to various monthly expenses based on your monthly income. Fixed repayments are easier to incorporate into your budget, making them easier to track and preventing the chances of a payment failure.
  • Avoid using credit cards: Credit cards can sometimes encourage irrational spending. It would be best to avoid running up a new balance on the credit cards for which you’ve already settled the balance. Although closing your credit account might affect your credit score, so keep the account running.
  • Keep your lender in the loop: If you ever happen to fall behind repayments, you should inform your lender. You could come up with a mutually agreed arrangement that alleviates your financial burden while ensuring timely repayments.

Conclusion

A personal loan for debt consolidation could be an excellent way to unclutter your finances in a systemised manner. However, you should first assess whether a debt consolidation loan aligns with your financial situation or not. It is also important to ensure timely repayments on your loan to avoid any credit score damage.

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