Consolidating loan for credit card debt

andyeyeam

This post is about getting a loan when you have a bad credit record.

The situation is debts of circa 5K GBP. Mostly a credit card but also Klarna and Council tax. This has been due to the impact of having to supplement a monthly income adversely impacted by absences caused by poor mental health. Credit rating is "very poor". I suspect a good way forward is to get a consolidating loan spread over 5 or 10 years. My ask here is how does she go about getting a loan? 

MattMattMattUK

andyeyeam said:

This post is about getting a loan when you have a bad credit record.

The situation is debts of circa 5K GBP. Mostly a credit card but also Klarna and Council tax. This has been due to the impact of having to supplement a monthly income adversely impacted by absences caused by poor mental health. Credit rating is "very poor". I suspect a good way forward is to get a consolidating loan spread over 5 or 10 years. My ask here is how does she go about getting a loan? 

Hi Andy

As was said on your other thread a consolidating rarely works, they usually just make things far worse. Many see them as a solution, but the reality is that they kick the can down the road for a short period of time then blow up in the face of the person who takes them out (or their guarantor). With a poor credit report (ratings mean nothing) and an irregular or low source of income no one is going to lend to her, the reality is she is not getting a loan, she cannot pay her existing debts so no lender will lend her more.

As was suggested on the other thread the credit card and Klarna debts she can just stop paying and default on, they are non-priority debts and based on your brief description of her circumstances they do not matter. She could then look at an DMP or bankruptcy as previously suggested. The Council Tax is a priority debt, she needs to engage with the council on that one and get it paid. 

It would be a good idea for her to complete a full SOA and post it on here, then others can advise options. 
https://www.lemonfool.co.uk/financecalculators/soa.php

Emmia

The other thread 

https://forums.moneysavingexpert.com/discussion/6594843/in-debt-with-a-bad-credit-history-seeking-a-consolidating-loan#Comment_81347095

ManyWays

With a bad credit rating, a consolidation loan will either not be possible, or it will be expensive and secured on her property (and so dangerous), or it will be extremely expensive and likely to be unaffordable.  

sourcrates

Consolidation is generally a very bad idea, with bad credit, the only loans she could get would attract high interest, and she would likely end up much worse off than she is now.

I think you should shelve that idea, as it will just make things ten times worse for her.

The best way to deal with bad debt is to use a recognised debt solution, that does not involve borrowing more money.

With her debt only being 5k, this should easily be manageable, fatbelly set out the way to deal with the council tax arrears in your other post on the loans board, the rest is all non priority debt and can be managed using a DMP.

Debt management can be arranged yourself, or by using one of the free debt charities, however I think bankruptcy is a "bridge too far" in this case, there are much more suitable solutions open to her.

She really needs to post a statement of affairs on here herself, then exact advice can be given, as its so easily manageable when the debt is only 5k, but debt solutions are unique to the individual you see.

RAS

Going BR for £5k, or even using a DRO is using a sledgehammer to crack a peanut. 

One problem with debt and mental health is that they can combine into a downward spiral. Some people get into debt because of a mental health problem, which causes more mental stress, makes it harder to deal with the debt financially and mentally.

The starting point for your daughter is the Statement of Affairs. Simply, can she afford to keep the roof over her head, food in her belly, pay Council tax (does she rent alone/have a mortgage?) pay essential media and utilities? 

Beyond the Council Tax debt, which needs addressing urgently before fees are added, the other consumer debt can be ignored in the short-term.  Neither she nor we know if she's in a position to make any contribution, but if she stopped paying all the consumer debt the world will not end. 

andyeyeam

What great advice from all concerned. I have a different view of what is best as a result. One puzzling aspect is the consistent view that consumer debt can be ignored. Credit cards and Klarna. Surely this will escalate at some point with some pretty bad consequences. Could someone just elaborate a bit on why the advice is to "ignore" or deprioritise the consumer debt? Which, by the way, is the vast majority of it.

RAS

If you are unable to pay the minimum, but keep making token payments, your credit record can be damaged for 6 years after the debt is paid off.

If you stop paying, the creditor will issue a default some time, generally 3-18 months. Interest and fees are halted and 6 years after the default, the debt disappears from your credit record, so your credit record improves.

It's counter-intuiative, but the most efficient way to improve your credit record is to stop paying the debts as soon as possible. Once the defaults are in, you can start making payments. Meantime start saving the unused money into an emergency fund. Ideally enough eventually to pay a rental deposit and moving costs or one month's essential spends.

Debt collection is almost entirely automated. Most times the threat of further debt collection action means the computer has the next letter programmed in the system.

Given your daughter's mental health issues, it would be appropriate to tell the creditors to remove her phone and email details from their system. Anything legal has to be sent snail mail.

Just be aware that the letter before a default is issued is scary, but the wording is defined by law, and creditors do not expect immediate payment of the full sum. If she sets up payments of defaulted debts, creditors rarely take any further action as that costs money simply to get the same monthly payment.

sourcrates

andyeyeam said:

What great advice from all concerned. I have a different view of what is best as a result. One puzzling aspect is the consistent view that consumer debt can be ignored. Credit cards and Klarna. Surely this will escalate at some point with some pretty bad consequences. Could someone just elaborate a bit on why the advice is to "ignore" or deprioritise the consumer debt? Which, by the way, is the vast majority of it.

All non essential debt is deemed to be non priority, every company knows this to be the case, they are last to be paid when things are tough.

The absolute worst that can happen if you completely ignore an unsecured debt is you might get a CCJ, which can be repaid subject to your available disposable income, same as any debt.

The collection of such debts is mainly left to debt collection agencies, who run through a pre-arranged automated collection process with you, this takes time, 8 months, a year, five years is not uncommon, it can be a long process due to the number of bad debts there are out there, so there is no hurry to do anything with these accounts, as although the letters they send may intentionally sound provocative and urgent, they are not.

When a debt is sold to a 3rd party, the same collection process runs its course, however the chances of legal action are increased now as they have bought the debt cheap, and want to get some return on it, so in that scenario, you might have to move somewhat quicker.

But leaving accounts alone until they default is normally the best way to deal with them as all interest is then stopped.