Generally speaking, the debt consolidation process takes place when a borrower takes out a new loan, usually with a lower interest, to pay off existing debts. This can include everything from credit card balances to personal loans.
There are various reasons why people chose to consolidate their debts.
Some people find out that their credit score has improved since obtaining their current loan, and look to reduce their monthly repayments, by consolidating their debt and moving to a loan with a lower interest rate.
In some circumstances, people have multiple debts and struggle to remember when they need to make repayments and therefore look to consolidate their debts to simplify their monthly payments. This helps people to understand their debt better and makes it easier to budget for the month.
There are two types of debt consolidation loans, secured and unsecured.
Secured and unsecured loans – what’s the difference?
A secured loan, also referred to as a homeowner loan or second mortgage is used to borrow money that is secured against your home. This means that your home acts as a form of security for lenders if you are to unable to keep up with the monthly repayments.
Because the borrowed money is tied to your property, you are able to borrow a larger amount of money typically with a lower interest rate in comparison to an unsecured loan.
In contrast, an unsecured loan, also known as a personal loan does not require any type of collateral such as a property or a car. Instead of using a borrower’s assets as security, lenders assess a borrower’s eligibility based on a borrower’s creditworthiness.
Unsecured loans can be an ideal solution if you are consolidating a smaller amount of debt. However secured loans are typically more suitable if you want to borrow a larger amount of money.
This is because you can borrow more money often at a lower rate over a longer period of time with a loan secured against your property.
The purpose of your loan and personal circumstances will likely guide which loan type you choose. For example, if you have a strong credit history and only intend to borrow a smaller amount of money you may opt for an unsecured loan.
What you should consider before consolidating your debts
- Ensure you can afford the monthly repayments over the agreed term. To check this, calculate how much you could realistically afford to repay each month, taking all of your monthly expenses into consideration.
- Find out if there are fees involved for paying off your loan early
- Check that the product is appropriate for your needs
We have years 30 years of experience in helping people find the right type of loan for their circumstances, specialising in secured lending for those that are looking to consolidate their debts, who have previously been turned down by highstreets lenders.
If you are considering taking out a secured loan to consolidate your debts and would like to discuss your options with a qualified advisor, call us on the number at the top of this page or complete our ‘Contact Us’ form and we will call you back.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.