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 provide debt advice and 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 debt advice on lending options.
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 amount you can borrow will depend on the amount of equity in your property and your affordability. 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. It is possible that some brokers will consider poorer ratings, however in this instance a higher rate interest is likely to apply.
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.
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 advisors for more debt advice and 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 get proper debt advice 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.
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 rating 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. Unsecured loans are usually repaid over a period of 6 years or less.
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 – When does it make sense and what are 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.
When should you consider debt consolidation?
You can seriously reduce your outgoings by consolidating your debt and having just 1 affordable monthly payment.
The loan repayments are lower than your previous payments to creditors and as a result your budget is now healthier. In addition, consolidating your debt in this way will help to preserve your credit rating.
Is debt consolidation that easy?
When considering your application, factors that are considered are:-
Will the loan clear all your debt, your credit rating and any defaults that you may have, your income and outgoings including debt payments plus if you are a homeowner the value of your property and how much is outstanding on your mortgage.
If you are already struggling with debt or have a poor credit rating, the rate of interest charge could be high. This may mean that you pay back far more than you originally owed over a longer period of time as well.
You also need to consider what might happen in the future. What happens if you lose your job, or interest rates go up. It makes sense to compare the total you would pay with a loan compared to a debt management plan or possible an Individual Voluntary Arrangement.
If you take out an unsecured loan and cannot meet the payments, the total you will owe will not only include the loan but all the interest payments outstanding as well.
Consolidating debt through a secured loan
Consolidating unsecured debt into secured debt could mean that the debt is repaid for periods of 25 years or longer, which will result in much higher interest payments. Once the debt is secured it is not possible to include the debt in a debt plan which could include debt forgiveness.
Also a secured loan place your home at risk if you find in the future you cannot afford the payments. Your home may be repossessed if you are unable to keep up with your payments.
Most second mortgages do not allow you to transfer your secured loan to a new property. However, 1st lenders frequently will allow your existing mortgage to be transferred to a new property.
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.