With the current economic uncertainty, borrowers with a high amount of outstanding personal debts will likely be looking for ways to reduce their repayments and make the debts more manageable. For many, consolidating debt into a loan provides an easy and efficient way of managing the debt and can also reduce the monthly repayments.
Whether using a secured loan to consolidate debts is the right option will depend on the individual’s personal circumstances. Those struggling with debt, or who want additional advice, should consider speaking to Citizen’s Advice or a free debt charity.
Usually, a secured loan is an option available to those looking to borrow a significant amount of money, typically £20,000 or more. As well as this, a secured loan can be approved within a few weeks, making it a relatively quick way to consolidate debts.
Borrowers should also be aware that a secured loan has greater risks than unsecured loans. This is because a secured loan requires the borrower to put an asset, usually their home, as security against the loan. This means that if they fall behind on repayments or are unable to repay the loan, they could end up losing their home. In addition to this, the interest rate on secure loans are often not fixed, which means borrowers could see their repayments increase and this should be taken into account when considering the affordability of the loan.
The main benefit of using a secured loan to consolidate debt is that it can reduce the monthly repayments.
How much can be saved consolidating debt into a secured loan will depend on many factors, such as the amount of debt to consolidate, the amount being borrowed on the secured loan, as well as the interest charged on the loan, which will depend on factors such as the borrower’s credit score.
To give an idea of how much can be saved consolidating debt through a secured loan. we’ve outlined two real life cases.
The first involved a borrower looking to take out a secured loan of £85,000 to be used to consolidate £25,734.82 worth of debt on a credit card, personal loan and a bridging loan. The remainder of the money was to be used to make home improvements.
The existing £25,734.82 worth of debt broke down to £5,929 owed on a credit card, £3,000 personal loan, and £16,805 left to repay on a bridging loan. The interest these debts would incur be £4,727.38 if continued and monthly repayments of £2,008.37.
The secured loan of £85,000 had a repayment term of 10 years at a rate of 3.40% (5.43% APRC). This resulted in the total interest for the debt to be consolidated being reduced to £4,717.39. It also reduced the monthly repayments from £2,088.37 to just £914.05.
The second borrower took out a secured loan of £55,000. This would be used to consolidate £53,901.68 worth of debts held on a credit card and five loans, with the remainder of the money to be used to make home improvements.
The existing £53,901.68 worth of debt broke down to £20,668 being owed on a credit card and five loans with outstanding balances ranging from £1,800 up to £20,668. If the debts remained as they were, they would incur interest costs of £22,352.42 and monthly repayments of £1,945.80.
The secured loan of £55,000 had a repayment term of 10 years at a rate of 3.40% (5.43% APRC). This reduced the total interest cost to £15,973, as well as reducing the monthly repayments from £1,945.80 to £591.44.
For those with a smaller debt, a personal loan may be a better option for consolidating debt. Personal loans offer rates from as low at 3.40% APR and can sometimes be approved within days of the application. As well as this, when taking out a personal loan a borrower does not have to put their house as security against the loan, but due to this, lenders are often stricter about to who they will lend money.
Another alternative is consolidating debt through remortgaging their existing mortgage at a higher loan-to-value (LTV). This allows homeowners to release some of the equity they have built up in their home and, with fixed remortgage rates currently from as low as 1.17%, the interest rates are lower than with personal and secured loans. The downside to consolidating debt through a remortgage is that it can take much longer for a remortgage application to be approved than a personal or secured loan, and as such this may not be the right option for those looking to borrow money quickly. As well as this, although many remortgage deals have a low interest rate, depending on the length of the mortgage term, which can be 25 years or more, the total cost of borrowing through a remortgage may be higher than with a personal or secure loan.
For those struggling with debt a Debt management Plan could also be an alternative option. This would allow borrowers to freeze the interest on their debts and makes the repayments more affordable, giving borrowers the ability to repay their debts without having to take out an additional loan. For more information about taking out a Debt Management Plan, borrowers should speak to Citizen Advice or a free debt charity.
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