What is Debt Consolidation?
One way to make problem debts more manageable is to use further credit, often in the form of a loan, to ‘consolidate’ your existing debts by using the borrowed money to pay off the existing debt.
If you have a property with equity you may be able to take out a secured loan, re-mortgage or equity release product, all of which would be secured against your home. Loans that aren’t borrowed against an asset, such as your house, are known as ‘unsecured loans’.
How it works
By replacing multiple debts with a single debt this can be a way to make the repayments more affordable and simpler to manage.
There may be costs associated with the product chosen including any fees charged by a broker or financial adviser, which may increase your total debt if you need to use the new loan to pay them, and other fees for early settlement of the loan in the future.
We recommend obtaining independent financial advice before considering taking on new credit, especially when you are struggling with existing debt – particularly when considering any form of secured borrowing as this may put your home at risk in the future.
If you jointly own your property with another person, they could be impacted by your new secured borrowing, even if they are not named in the credit agreement. You should notify them of your intentions and encourage them to obtain their own advice.
Advantages of Debt Consolidation
One monthly repayment
It’s easier to organise your finances if you’ve only got one debt outgoing. It also reduces the stress of letters from different creditors.
An end in sight
Covering all your other debts with a loan gives you a fixed time of payments before becoming debt-free.
Lower overall cost
If your existing debts involve high interest rates then a consolidation loan may reduce this cost if you are offered a more favourable interest rate by the lender.
Disadvantages of Debt Consolidation
There’s always a downside with any debt solution. Below are some things to be aware of.
Not everyone qualifies
Poor credit rating or a having a heavy debt burden might stop lenders giving you a loan, or mean they only offer a loan with a high interest rate as they see you as too great a risk.
Consolidate your debt
If you’re taking out a loan to pay off all your other debts, you absolutely must make sure that you pay them all off when you get the loan money. If you don’t, you’ll simply make your situation worse. You should avoid borrowing more than you really need.
Similar to the point above, make sure that the terms are actually affordable. There’s no point putting all your debts into one if you can’t then repay that debt either. Also, if you aren’t able to borrow enough to settle all of your existing debt, then prioritise the most expensive debt to pay off, making sure you can afford all the repayments you will be expected to make on the consolidation loan and the debt left out.
If you take out a remortgage, this means that you are replacing the whole of your existing mortgage with the new mortgage product and if that has a higher interest rate than your existing mortgage this could significantly increase your housing costs overall.
Some lenders may ask you to find a guarantor – a friend or relative willing to guarantee your loan, meaning that they have to repay the debt if you are unable to. If you are considering this option, make sure the guarantor understands what this could mean and encourage them to obtain their own advice before agreeing to be a guarantor.
This is unlikely to happen with any secured borrowing.
Most banks will not lend more than approximately £25,000 as an unsecured personal loan so if your debts exceed £25,000, you won’t be able to put them all into one monthly repayment. This could actually be worse than finding a non-borrowing option, unless you are sure you can manage the repayments on the loan as well as the debts you didn’t consolidate.
You may be able to borrow more with a secured product, on the basis that the lender has more protection from the fact that if necessary, they could force you to sell your property to repay them.
Limited repayment term
Most banks will limit the term of personal loans at five to ten years. Nothing is written off, so all your debt repayments have to be covered in that five- or ten-year period including the interest added to the loan. It means your repayments might be quite high or you cannot borrow enough to consolidate all of your existing debt.
Again, you may be able to obtain a longer repayment term with secured borrowing, and equity release products may not be fully repayable until you sell your home in the future.
However, bear in mind that a longer repayment term means more interest will be charged overall, even if the interest rate offered is lower than your current rates.
Your home is at risk with any secured borrowing
Fail to meet your payments and your lender can force a sale of your property to recover the debt.
We don’t provide services relating to Debt Consolidation or obtaining further credit of any kind. However, when you speak to u,s we will make sure you are aware of it as an option for you to consider.