Debt Consolidation Loans

How debt consolidation loans work...

A debt consolidation loan is a way of moving all your existing debts, such as credit cards, loans, and store cards into one place.

Consolidating debts in this way can be a great way to improve your financial health and manage your current debts more easily.

If you find yourself faced with any of the following situations:

• Struggling to keep up repayments on outstanding debts
• Difficulty managing payments from a variety of different sources
• Paying excessive interest rates on debts
• Forgetting to make certain repayments

. . . then read on!

The two types of debt consolidation loan

There are two different types of debt consolidation loan available. Which one you choose will depend on your personal circumstances and preferences.

Secured debt consolidation loans
Secured loans require you to be a homeowner, as the bank uses your property as collateral for the agreed loan (it is the bank who has the security, not you!).

Secured debt consolidation loans allow you to borrow money that is tied up in your property known as equity. The amount of equity you have can be simply calculated by taking the current market value of your property minus any outstanding mortgage repayments you have remaining.

- For example: If you bought your house for £125,000 and you have £25,000 mortgage outstanding. If it were now worth £250,000 you would have £150,000 of equity in the property.

Secured loans, can therefore, afford to lend you larger amounts of money (typically between £5000 and £100,000) over longer periods of time.

Due to the added security the lender receives it is also more likely that you will be accepted with a bad credit history.

Unsecured debt consolidation loans
These loans are based on your financial history and credit rating and do not require you to be a homeowner.

This makes them more difficult to obtain if you have a bad credit rating, but a safer option, as you have no personal possessions secured against the loan borrowed.

As the lender has less security the amount you can borrow is a lot less (typically £1000 to £25,000).

Which debt consolidation loan is right for me?

This depends entirely on your personal circumstances. If you need to borrow a lot of money and have a home with large equity, a secured loan may be a better option. But if you have only an overdraft and a couple of credit card debts to eliminate you may be better off with an unsecured loan.

Fortunately, ChooseMoney compares all the best rates around from a cross section of lenders to help you find the right loan four your circumstances.

Compare debt consolidation loans