Can I consolidate debt with any loan?

1 March 2010

If you have multiple debts and you would like to reduce your monthly outgoings or just simplify your finances, a debt consolidation loan could help you do that. By using a new loan to pay off existing debts, you`ll `consolidate` your debts into one debt - with just one payment per month - making your debt more manageable.

What type of loan can I use to consolidate my debts?

In theory, you can use almost any type of loan to consolidate your debts. A `debt consolidation loan` is basically just like any other loan - whether it is secured or unsecured.

However, the type of debt consolidation loan you choose will affect other things - so it`s important that you understand each type of loan before you make a decision.

Secured debt consolidation loan

If a loan is `secured`, it means that you have an `asset` (usually your home) placed as security against the loan. This means the loan is less of a risk to the lender, and as such you may well be offered a lower interest rate and a longer repayment term than you might be offered on an unsecured loan.

The downside of this is that it`s secured against your home. If you do miss payments, your home could be sold to cover the debt.

And remember: repaying any debt more slowly can add to the overall cost as it`ll be gathering interest for longer (but on the other hand, the interest rate on the consolidation loan could well be a lot lower than the rates on the original debts, meaning the debt would grow more slowly).

Unsecured debt consolidation loan

An unsecured loan does not have anything placed against the loan as security.

You might consider this the `safer` option, because you won`t risk losing your home if you miss payments. But the consequences of defaulting will still be severe - your credit rating will be affected, and you may face court action from your lenders if you continue to miss payments. As with any loan, you shouldn`t take one out unless you`re sure that your income is big enough - and steady enough - to commit to making the monthly payments.

Debt consolidation remortgage

Although a debt consolidation remortgage is a type of secured debt, it works differently to a secured debt consolidation loan. Instead of taking out an entirely new loan to pay off your existing debts, you`ll remortgage to `free up` some of the equity in your home to pay off your debts (effectively `borrowing back` some of the value of your home).

Basically, you`d get a new mortgage that`s large enough to pay off your debts and your original mortgage. So you`d increase the amount you owe to a mortgage provider, but you`d no longer have any other debts to keep up with.

You will need to be an existing homeowner to get a debt consolidation remortgage. And, as with a secured loan, you could be putting your home at risk if you don`t keep up with the payments.

For more information on debt consolidation loans and other ways you can consolidate your debts, call us today on 0800 074 8639.

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