Debt consolidation loan or debt consolidation mortgage?

20 November 2008

If you’re in debt, there’s a good chance that debt consolidation could be a suitable way of bringing (or keeping) your debts under control.

The first thing to note is that debt consolidation isn’t always appropriate: some people would be better off with an alternative debt solution, such as a debt management plan or an IVA (Individual Voluntary Arrangement).

The second is that the term ‘debt consolidation’ actually applies to two different debt solutions – you can consolidate your debts with a debt consolidation loan, or with a debt consolidation mortgage. So: Which is better? Which is right for you? What are the pros and cons?

Debt consolidation loans & mortgages – pros & cons Either debt consolidation solution can be a good way to reduce your monthly debt repayments and reduce the interest rate you’re paying. Either can simplify your finances, which should make it easier for you to avoid making a payment late or not at all (something which can lead to fines and damage your credit rating – which could make credit more expensive and / or harder to obtain in the future).

However, be aware that either a debt consolidation loan or a debt consolidation mortgage could end up costing you more in the long run, and postpone the day you’ll be debt free.

What is a debt consolidation loan?
If you owe money to various creditors, you could take out a new loan large enough to pay them all off in one go. If you do, you’ll owe money to just one creditor (the one who gave you the debt consolidation loan).

If you’re a homeowner, you’ll need to decide whether or not to secure that loan against your home.

In a credit crunch, of course, loans can be quite difficult to obtain, and can also be expensive. And even when the economic climate is positive, debt consolidation isn’t always the best way forward.

It’s never a good idea to take out a debt consolidation loan without discussing some serious issues with a professional debt adviser. For example:

• Would it be better than gradually paying off my current debts?
• If I do consolidate my debts, how much should I arrange to pay back each month?
• Could I realistically afford those repayments?
• What other options do I have?

What is a debt consolidation mortgage?
A debt consolidation mortgage is only available to homeowners.

Basically, you can ‘add’ your unsecured debts to your mortgage – not directly, but by taking out a new mortgage (with the same mortgage provider or with a new one) that’s large enough to pay off your current mortgage and your unsecured debts.

Like secured loans, remortgages can come with much lower interest rates than unsecured loans. However, as secured loan and mortgage sites always say: ‘Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it’.

Also, since mortgages tend to last a lot longer than most loans, a debt consolidation mortgage can ‘stretch’ your unsecured debts over many years – potentially, many more years than a debt consolidation loan would. On the plus side, this can seriously reduce your monthly payments. On the minus side, it can also add to the overall cost, as you’ll be paying interest for longer.

Which is better for me?
If you’re a tenant, a debt consolidation mortgage won’t be an option.

If you’re a homeowner, it may be a better idea than a debt consolidation loan – but it may not be. It may not even be an option. It all depends on:

• How much you owe
• How much equity you have in your home
• How much longer your current mortgage has to run

…and a range of other questions.

Either way, debt consolidation, like any debt solution, should not be taken lightly. Before you commit yourself to anything, contact a professional debt adviser who understands all the different debt solutions – from debt consolidation and debt management to IVAs (Individual Voluntary Arrangements) and bankruptcy – and can help you make the right decision.

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