For anyone struggling to repay or keep track of multiple existing debts, consolidating them with a secured loan could be the ideal solution. You can use a secured debt consolidation loan – also sometimes known as a second-charge mortgage – to cover all of your existing debts and repayments and take back control over your finances. This could be the answer for those who struggle to juggle different repayment amounts all due at different times of the month.
While a secured debt consolidation loan will not reduce the amount you owe overall, it can help you to achieve smaller, more manageable monthly repayments. Getting your finances organised in this way can help to relieve the stress and worry that often comes with money troubles and debt. At Free Price Compare, we can give you the information you need to decide whether a secured debt consolidation loan is the best option for you. We can help you find out if you are eligible for a secured loan. We can also sort through deals from more than 100 providers to find the best one for you.
What is a secured debt consolidation loan?
A secured loan is one that requires collateral such as property or assets. In most cases, these types of loan are secured against a person’s home. A secured debt consolidation loan can be used to merge a collection of multiple smaller debts such as credit cards, overdrafts, store cards or personal loan debts. To do this, you need to apply for a loan that covers the amount of existing debt you have and use that loan to pay it all off. You will then need to pay off the secured loan itself over time.
How does it work?
A secured loan for debt consolidation works by allowing you to pay off your existing smaller debts in one go. First, you need to calculate the total value of your existing debts and apply for a loan for that amount. For example, if you owe £3,000 on a credit card, £1,000 on a store card and £1,500 on your overdraft, you will need to apply for a loan of £5,500. This loan is then used to pay off your existing debts in full. You then need to pay back the secured loan, which is usually done in monthly repayments.
How do I know if a secured debt consolidation loan is the best solution for me?
There are certainly pros and cons to take into account when considering a secured debt consolidation loan. You will need to weigh up the benefits and risks in light of your own situation before deciding to proceed.
Consolidating with a secured loan can be a good idea provided that all of your debts will be covered by the loan amount, the loan repayments are lower than your current debts and you can definitely afford the new monthly repayments. Otherwise, as a secured loan is another type of loan, it could simply lead to more debt.
Secured debt consolidation loans – the benefits
There are several reasons why secured loans are popular for debt consolidation.
It allows you to repay just one single monthly repayment rather than having to keep track of multiple repayments on different dates.
As secured loans are usually considered less risky than an unsecured loan (i.e., one not backed up by an asset such as a property), they are usually easier to obtain. Someone with multiple existing debts is likely to find it difficult to be approved for another unsecured loan. A secured loan has a much better chance of approval.
Secured loans are considered lower risk for lenders, meaning you can often get a better interest rate, allowing you to make smaller monthly repayments. The interest rate you receive will depend on your credit history, as well as the terms and length of the loan.
Secured debt consolidation loans are more flexible and tend to be repaid over a longer period, which can also help to lower repayments. Loans can even be repaid over a period of up to 30 years.
One single, lower monthly repayment is easier to achieve than multiple repayments, so it can help to boost your credit score.
Secured debt consolidation loans – the risks
As with most loans, there are some risks involved in taking out a secured debt consolidation loan.
As your home is used as collateral, secured debt consolidation loans can only be taken out by homeowners.
There are fewer providers of secured loans and they are mainly only offered by specialist lenders. Free Price Compare can help you find potential providers within seconds.
The equity you have in your home could be at risk if you default on payments. In extreme cases, your home could be at risk and could even be repossessed.
A secured debt consolidation loan may allow you to reduce monthly payments but it may be for a longer-term, meaning you will pay more overall.
Failure to make payments on time could have a negative impact on your credit score.
How much does a secured debt consolidation loan cost?
Secured loans generally have more favourable interest rates because they are considered by lenders to be less risky. Your initial application will need to cover the cost of your existing debts. The cost of your debt consolidation loan will depend on how much you borrow, how long you intend to take to pay it back and the loan interest rate. Always be sure to check for any extra fees such as any cost incurred if you pay off the loan early.
Try to keep loan costs down by only borrowing the amount you need and trying to repay it over the shortest time possible. While a longer repayment period will mean lower monthly repayments, it will also likely mean a bigger repayment overall. Careful financial planning is needed to make sure you can stick to your payments. The cost of a secured loan and your interest rate will also depend on your credit history and what equity you have in your home.
At Free Price Compare, our online tool will tell you if you are eligible for a secured loan for debt consolidation purposes within a matter of seconds. Simply tell us the amount you want to borrow, over how long, your property value and your mortgage balance, as well as some personal details and we will check eligibility and compare dozens of loans for you.
What if I have bad credit?
The good news is a secured debt consolidation loan is often a good option for people with a bad credit rating. This is because it is backed by the value of your home and, as such, is not considered as risky. You are more likely to be able to get a secured loan than further unsecured loans. There are also some specialist providers who offer debt consolidation loans for people with bad credit. A person is considered to have bad credit if they have a history of not paying their bills on time and a credit score of under 580 .
In fact, a secured debt consolidation loan could help to boost your credit rating if you are able to keep to the agreed schedule of repayments, paying the full amount on time. By reducing the amount of your monthly payments, it is likely to make it easier to meet the payments and boost your credit score in the process.
Struggling with money issues and debts can have a major impact on your health and wellbeing, so taking action to get on top of any concerns and problems is key. A recent survey by the Money Advice Service (MAS) showed that around 74% of people struggling with debts and repayments classed themselves as ‘unhappy.' Around 4.4 million Brits are said to have been struggling to pay their bills for more than a year . If you have multiple outstanding loans or credit cards to repay, it can be a juggling act to keep track of repayments and stay organised. Do not hesitate to ask for help from advice services if you are struggling with loan repayments and debt.
Can I pay back a secured loan early?
Secured loans can be paid back early but there may be charges for doing so – always check the terms and conditions of your policy. For loans of less than £25,000, the repayment charge is usually limited but with larger amounts, there are no maximum limits.
Are there other ways to consolidate my debts?
Those who do not own their own home may still be able to consolidate their debts. Other options are available, including getting an unsecured personal loan. However, lenders may not be as willing to approve a loan if you are already struggling to repay several loans on time. It may also mean you are severely restricted as to how much you can borrow. Personal loans can be used for debt consolidation in some cases but some have to be used for specific purposes only such as home renovations or buying a new car.
Free Price Compare can help you explore what personal loan options are available. You need to look carefully at your own financial situation before deciding what kind of loan or debt consolidation solution may be suitable for you. If you only have a few debts and have a good APR then it may be worth sticking to the existing repayment plans to avoid upheaval and possible charges or fees.
Top tips for using a secured loan for debt consolidation
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It is your responsibility to use the loan to pay off existing debts. Do this as soon as possible so you are not tempted to use the money for something else.
Do not borrow more than you need. As tempting as it may be, the aim is to keep monthly repayments as low and as manageable as possible. Try to repay the loan amount as quickly as possible to avoid a bigger overall repayment.
Consider all your options before taking on another debt. Assess your finances closely to ensure it is definitely affordable, even if there are any changes in circumstances.
If you are worried about debt or your finances, help is available from The Money Advice Service, a free and impartial advice service set up by the government. Speak to your lender if you are struggling to repay your loan.
How can Free Price Compare help you to find a secured loan?
You can use our online tool to see if you could be eligible for a secured loan. Free Price Compare can also compare secured loans for you, helping you to get the best deal possible and saving you time and money. We work with our secured loan partner Loanswarehouse, which is authorised and regulated by the Financial Conduct Authority, to help find the best possible option for you. You can also speak to one of our knowledgeable and friendly advisers for more information.