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If you’ve got outstanding personal debts including unsecured loans, credit cards, overdrafts and store cards then you might want to consider a loan to consolidate them into a single monthly payment. These so-called "debt consolidation loans" enable you to repay the outstanding balances on personal loans, store or credit cards and overdrafts and lump all of these monthly outgoings into a single payment. The reason this could make sense is that you might be able to cut your monthly costs to help with your budget and possibly reduce the total amount of interest you'll pay overall. You'll also simplify the administration of your debt repayments.
The average amount of personal (unsecured) debt per household in the UK is about £6,000 with many people owing significantly higher amounts than this. Managing that amount of debt and dealing with that number of accounts can be a struggle so merging these into a single loan can be a way of potentially lowering your monthly repayments and simplifying the administration. If you own your home and still have a mortgage then you can use a homeowner loan to consolidate this unsecured debt. As this type of loan is secured against your home you should benefit from lower interest rates than you are currently repaying on your unsecured debts.
Remember though, debt consolidation loans don’t reduce the overall amount that you owe but are a way of either reducing the monthly repayment or extending the repayment terms or both. The monthly repayment on such a loan will include the interest payment on the loan as well as a part of the capital.
When you apply for a homeowner loan with which to consolidate your debts, the actual amount of interest you’ll be paying will depend on a number of factors including the amount of equity in your home, your ability to meet the repayment schedule comfortably (i.e. its affordability) and your previous credit history. Unlike a lot of unsecured lending, debt consolidation loans are often available to people with previous credit problems, the self-employed and those working on contracts.
If you’re thinking about applying you should work out how much interest you’re currently paying on your personal debts and how long you’ll be repaying those debts for. Then compare that with the homeowner loan interest rate and repayment schedule. You should bear in mind that although your monthly payments may be significantly lower than your total repayments at the moment, the amount you’ll end up repaying may be higher with a debt consolidation loan. This is because of a number of factors including the length of loan that you decide to apply for.
You may be finding it difficult to get out of debt because of the number of bills that you receive each month. This can make it hard to keep track of which payments are due on which date. Replacing these with a single new loan can help with this by cutting the number of bills from many to just one allowing you to focus on managing your outgoings and getting out of debt.
So, why might a debt consolidation loan make financial sense? For instance, let’s assume you have a total debt of £10,000 comprising:
In this example you’d be repaying more than £435 a month and end up paying more than £4,145 in interest. By switching to a debt consolidation loan with an interest rate of 12.5 per cent, you could reduce your monthly payments to £335 and potentially halve the total amount of interest you need to repay (assuming a 3 year repayment period). But keep in mind that your home is at risk if you fail to keep up repayments secured on it. Also, it is possible that while reducing the monthly amount you may end up paying more overall. It depends on your personal situation and the loan options available to you.
If you do take out a secured homeowner loan to consolidate your existing debts, it’s important that you don’t add to your personal debt. Don’t use your credit cards and don’t take out further personal loans. If you were to then this would defeat the object of taking out the debt consolidation loan in the first place and may have an impact on your credit rating. If you keep up the repayments on your consolidation loan and clear your existing debts then your credit rating is likely to improve.
You should always remember that a homeowner loan is secured against your property, meaning that you could end up losing your home if you don’t keep up with the repayments. If you’re confident that you can comfortably afford the repayments and that you will be able to do so over the term of the loan, then a single loan that replaces your existing debts can be a much more efficient way of managing your debts and getting on top of your repayments. As with all loans you will will reduce the total interest you pay by repaying the loan as quickly as your budget will allow.
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 OTHER LOAN SECURED ON IT. IF YOU ARE THINKING OF CONSOLIDATING EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY
* Actual rate will depend on personal circumstances and credit assessments. To find out what rate you can get apply below. The current Representative APRC is 9.1%, including lender and broker fees.
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