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What is Debt Consolidation

Debt consolidation generally means clearing your unsecured debts using funds raised by secured or unsecured loans, remortgaging your property or perhaps using equity release. The debts could include credit cards, loans, council tax or utility arrears or debts due to HMR & C.

Debt consolidation is only recommended if the monies raised will clear your debts, the repayments are affordable and will leave you in a better position financially.

Is Debt Consolidation suitable for me?

Debt consolidation is appropriate in the right circumstances.  We are able to offer advice on all available and appropriate solutions including consolidating your debts with new advances.

For example, it may be possible to raise a sum of money and offer this sum to creditors as a discounted settlement. Our case studies include examples of how we have been able to help our clients settle their debts at a discount. Our team will properly assess your circumstances and if consolidating your debts with a new loan is right for you, we work with specialist brokers who do offer a range of different lending solutions and who are regulated to offer advice on lending options.

Secured loans

If you are a homeowner then a secured loan can be a viable solution especially to pay off unsecured debt. A secured loan can be completed relatively quickly and is more appropriate if you need to raise more than £10,000. The monthly interest rate will be higher than with a remortgage, but the term of the loan is more flexible with repayment between 5 and 25 years. The APR will also vary depending on your credit rating.

The secured loan can be used in some circumstances to offer full and final settlements on unsecured debts that you are unable to afford to repay.

Remortgage

Borrowing additional money on your mortgage is often the cheapest way to raise extra funds. There are a range of lenders who offer remortgages to for debt consolidation, so it is good to shop around.

You need to carefully consider whether you can afford the new mortgage repayments. Please use our debt calculator to review your income and expenditure, or call our debt advisors for more help with consolidation.

Equity Release/Lifetime Mortgage

Increasing numbers of mature people are finding themselves with unaffordable debt levels. If you have a property with a low level mortgage or perhaps no mortgage, it is possible to raise money on your property to help out with your finances. These are long term loans that are secured on your property and usually paid back when you eventually sell your property.

There are a range of equity release products some of which involve paying off the interest with others that do not involve any monthly payment but where the interest is rolled up and paid off when the property is sold.

We strongly advise you are properly advised before agreeing to take out an equity release loan. These loans can carry expensive repayment penalties and generally the loans that do not require monthly payment will end up seriously increasing the amount you owe on your property.

If you are elderly and struggling with debt, please do speak to our advisory team. It is possible to propose IVA’s and debt management plans that will allow you to hold onto the equity in your property.

Unsecured Loans

Consolidating your debt through an unsecured loan is preferable to a loan that is secured on your property. Unsecured loans almost always require good to excellent credit and the interest charges are generally much higher especially if you have impaired credit. If you are already behind with repayments or owe a large amount of money then an unsecured loan will generally not be a suitable solution. The amount that can be borrowed is also generally not enough to pay off creditors in full.

There are other solutions including IVA’s, Debt Relief Orders, Bankruptcy and Dealing Directly with your Creditors which may be appropriate. If you live in Scotland, the solutions are different, please visit Scottish Debt Solutions.

How has Debt Consolidation helped others?

This is a real life story from Bob a customer who was able to avoid bankruptcy and clear his revenue debts with funds raised by a secured loan:

“I had ignored my financial affairs, had significant tax debts and was facing possible bankruptcy. The Revenue were owed £43,650 which related to VAT and self assessment tax and penalties for a period from March 2009 to April 2015. The TDA team asked HMR & C to hold action for 3 weeks to allow me to look into my options. TDA referred me to Loan.co.uk who were able to help me very quickly secure enough funding through a secured loan to clear my revenue debts. Bankruptcy would have meant I lost all my equity in my property of £170,000. I also had an interest in an investment property which I was able to protect. I learnt a valuable lesson and now am up to date with my tax.”

Debt Consolidation – The benefits and the risks

Raising money to clear your debts is possible but it makes sense to be clear about the short and long term benefits plus the risks of consolidating your debts with additional lending. It only really makes sense if the loan clears in full your debt.

The Benefits

  • You can seriously reduce your outgoings by consolidating your debt and having just 1 affordable monthly payment.
  • Debt consolidation can also be used to offer discounted settlements to your creditors. Check out our case studies for examples.
  • Debt consolidation can help to preserve your credit rating. Debt solutions such as debt management or IVA’s will have an adverse impact on your credit rating.

The Risks

  • Consolidating your debt with a secured loan or by way of a remortgage will convert your debt from unsecured to secured.
  •  If you are already struggling with debt or have an impaired credit rating then the APR that you are offered in Debt Consolidation may be high.
  • The loan plus the interest may mean you are repaying your debt over a longer period of time. It is always recommended before you take out new finance to clear debt, you compare how much you will repay to your creditors over the period of the loan with the amount you would repay instead by getting charges frozen and aiming to clear your debt using debt management or a formal solutions such as an IVA.

What does the service cost?

The Debt Advisor team will carry out an assessment of your circumstances and will make recommendations and there is no fee that is charged for this assessment. If debt consolidation is appropriate and we refer you to a regulated broker, we may earn a commission.

There are sources of free debt advice and services. You can find out more by contacting the Money Advice Service on 0800 138 7777 or by visiting their website.

If you've read through our section and feel like you would like some further information, please call us on our 0333 9999 600 and one of our advisors will give you the right help and advice based on your individual circustance.