If you’re struggling to keep on top of multiple consumer credit debts such as credit cards and personal loans, you might want to know more about secured debt consolidation loans. A debt consolidation loan could help pave the way out of your debt nightmare. 

Learn more right here!

What is debt consolidation?

Debt consolidation is a strategy to make debt repayments easier to manage and to make them somewhat cheaper. It is used by people who have multiple existing debts, such as credit cards, store cards and unsecured personal loans. 

To consolidate debts the debtor must take out new credit and use the money to pay off all their existing debts. Be aware, they may have to pay early repayment charges on each individual debt. Once debt consolidation has been achieved, the debtor only needs to manage one monthly repayment.

Why consider debt consolidation as a solution?

Debt consolidation is just one strategy to overcome debt in time, and there are other debt solutions you could consider. There are two main reasons to consider debt consolidation. These are:

  1. By securing credit with a lower interest rate compared to the interest rates being paid over the multiple debts, the debtor can save money going forward. However, they will also need to factor in any early repayment charges to make sure consolidating debts does make it cheaper. 
  2. Merging debts together makes it easier to keep up monthly repayments. With only one monthly repayment to manage instead of multiple repayments at different times of the month, the debtor has less chance of missing payments and having defaults recorded on their credit history. 

The different ways to consolidate debt

There are different ways to consolidate debts. The most common method is to take out a debt consolidation loan

If you just want to consolidate credit card debts, you may want to consider a balance transfer credit card where multiple credit card balances are transferred to one credit card, usually with an introductory interest rate of 0%. There may be a balance transfer fee to pay on each card balance transferred. 

Another way to consolidate debt is to remortgage for debt consolidation, which is where you borrow extra on your mortgage to pay off other debts. 

Or you may want to consider a Debt Management Plan, which merges your debts into one payment without actually consolidating them. 

What is a debt consolidation loan?

A debt consolidation loan is a type of loan specifically used for the purposes of debt consolidation. The loan is provided to the borrower and must be used to pay off existing debts. 

You do not have to use a debt consolidation loan to consolidate debts, but there may be advantages in doing so. 

Is a debt consolidation loan secured?

There are different types of debt consolidation loans. You can get them as secured and unsecured loans. 

A secured debt consolidation loan requires the borrower to use an asset as collateral within the loan agreement. This is usually a property or vehicle but could be something else. On the other hand, unsecured debt consolidation loans do not require the borrower to use an asset as security within the loan agreement. 

Do debt consolidation loans work?

Both secured and unsecured debt consolidation loans can work. By doing the maths and choosing the right debt consolidation loan, you can make repayments more manageable and save money on the rate of interest payable. 

What is the risk of a secured debt consolidation loan?

The risk of taking out a secured debt consolidation loan is that you find yourself in a situation unable to keep up your monthly repayments. If you have multiple payment defaults, the lender has the right to repossess the asset you used as collateral in the loan agreement. 

This asset will then be sold and the money raised will be used to clear all your debt with the lender, including arrears and fees. Any remaining money from the asset sale will be given back to the debtor. If you secure the loan with your home and do not keep up with monthly payments, your home may be repossessed. 

All secured loans have this risk and it may make you want to use an unsecured debt consolidation loan instead. However, secured debt consolidation loans may provide bigger loan amounts at a lower interest rate compared to an unsecured debt consolidation loan – personal finances and credit score depending. 

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How do I search for secured debt consolidation loans?

You can search for these loans online. They are widely available through banks and online loan lenders. You can even find them advertised through some UK supermarkets. 

When you search online, you’ll notice that most lenders advertise secured debt consolidation loans with a loan calculator. This calculator allows you to enter the loan amount needed and how long you want to repay. Using this information, the calculator will show your projected monthly payments and the interest you will have to pay.

However, the rate used is the representative example Annual Percentage Rate and is only active just over half of the time for approved applicants. You may be offered a higher or lower rate based on personal circumstances and your credit score.  

What are the interest rates on secured debt consolidation loans?

The best interest rates on secured loans are between 2% and 10%. You will see some secured loans advertised with much higher rates. These may still save you money depending on what interest you are paying across existing debts. 

Secured debt consolidation loans – an example

One example of a secured debt consolidation loan is available at Barclays Bank. This is not necessarily the best secured loan available to consolidate debts and is being used as an example only. You should do your own research. 

Barclays offers a secured debt consolidation loan of up to £50,000 with a maximum repayment term of up to 10 years. The amount you want to borrow and the loan repayment term affect the representative interest rate. For example, loans between £7,500 and £15,000 have the lowest representative example of 7.3%. The maximum rate they will offer anyone who gets approval is 20.9%. 

You should only consider using a lender that is authorised and regulated by the Financial Conduct Authority.

Can I get help looking for secured debt consolidation loans?

If crunching numbers and searching for the right secured loan is not your forte, you can get personalised help and support. Secured loan comparison websites can help you compare options swiftly and can be a good starting point. Or you could receive a more holistic service using a credit broker. You may be charged credit broker fees, but on the other hand, it will make the process easier, faster and could get you a better deal than if you searched independently. 

Can I get a secured debt consolidation loan with bad credit?

A secured loan is generally considered a little easier to get approved for compared to an unsecured loan. The reason for this is because using an asset as collateral reduces your lending risk. The lender feels it easier to get its money back when the loan is secured. Consequently, it is also considered easier to get a secured debt consolidation loan if you have a low credit score compared to unsecured debt consolidation loans. 

Having a low credit score may still get you approved but you might be offered a higher interest rate than what is advertised through the representative example. There are some debt consolidation loans advertised exclusively for people with a low credit score. 

We’ve written a post all about debt consolidation loans for people with bad credit here!

Can you get a debt consolidation loan without collateral?

As mentioned – and it is worthwhile remembering – you can get a debt consolidation loan without needing to list an asset as collateral. Unsecured debt consolidation loans are also a popular way to merge debts together. They present less immediate risks if you cannot pay the loan but they do not typically offer as much credit and the interest rates may not be as favourable. 

It’s also a good time to add that unpaid unsecured loans can still result in assets being repossessed. In this instance, the creditor could take you to court and ask a judge to allow them to enforce the debt with bailiffs. These people can come and take your valuables and sell them at auction if you don’t agree to pay. They also charge fees that are passed to you. 

What is the safest way to consolidate debt?

There is no single debt consolidation method that is safer than another method. For example, using a debt consolidation loan is not always safer or less safe than remortgaging for debt consolidation or using a balance transfer credit card. 

Rather, the safest way to consolidate debts is to be meticulous in your research and find a method that will provide you with savings. This involves more than comparing interest rates, which can be difficult when comparing one rate against multiple others on each debt, while also factoring in other fees and charges that may be applicable. 

Getting free or paid-for help may in fact be the safest way to avoid the pitfalls of consolidating debts. 

Read even more about secured debt consolidation loans

Uncover further details about secured debt consolidation loans and the process of consolidating debts. MoneyNerd has plenty more guides covering these topics from all angles – and it’s all 100% free! 

About the author

Scott Nelson

Scott Nelson is a financial services expert, with over 10 years’ experience in the industry, including 6 years in FCA regulated companies. Read more
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