You may have built up debt such as loans and credit cards and you are struggling to manage these and are feeling financially stretched. A debt consolidation secured loan could be an option to help you can gain control of your outgoings again and help you have a clear repayment plan in place.
When considering taking out a secured loan it is important that you are aware of all your options and you understand the pros and cons involved, so read on for more information.
What are the advantages of debt consolidating?
The main advantages of debt consolidation with a secured loan are:
Reduced Monthly Payments – Many debts, such as credit cards, can have a high interest rate of 18%+, so by consolidating these debts at a lower rate your monthly payments will reduce which will provide you with more disposable income each month.
Clear Repayment Plan – Although people take out credit cards as a short term debt they can easily become a long term debt which you may feel you are just simply not paying off. A secured loan will give you a clear repayment plan which you can work towards to clear the debt.
One Payment – Juggling many debts is stressful and it is easy to miss a payment which results in bad credit and potentially a charge from the creditor, so by having one payment to make each month everything becomes a lot more manageable.
What are the disadvantages of a secured loan to debt consolidate?
It is important to consider the following disadvantages:
Secured against your home – By taking out a secured loan you are ‘securing’ the debts against your home and if you do not keep up with the monthly payments you could lose your home.
Term – The loan maybe over a longer term than the debt currently has, so therefore it maybe more expensive in the long run
Fees – When taking out a secured loan there are fees to pay to set this up, so you will be creating more debt.
Is using a secured loan to pay debt a good idea?
It all depends upon your situation, for some it may be suitable whereas for others it is not the right option. It is important that you get advice in this area, explore all your options and clearly cost out the implications of any debt consolidation vs keeping the debts running as they are.
Who provides secured consolidation loans?
There are many secured loans providers in the market and these offer their products through mortgage brokers. As of 31/10/2020 these lenders provide secured loans:
Norton Home Loans
Step One Finance
United Trust Bank
West One Loans
What other ways can I reduce my outgoings without taking out a secured loan?
The following are other options you should consider:
Use Savings – although it is important to have some money put aside for emergencies, could you use some of your savings to reduce the debts.
Balance Transfer – Some lenders provide 0% balance transfers, so could you move the balance and have 0% interest rate for a period of time allowing you to pay off the capital quicker.
Unsecured Loan – There are high street banks and online lenders that offer unsecured loans which could be an option for you. Typically you can borrow up to £25,000 and over 5 years.
Debt Management Plans – This is an informal arrangement between you and your creditors to make a reduced payment each month.
Individual Voluntary Arrangement – This is a formal debt repayment plan where, with agreement of your creditors, you will pay an amount each month over a selected term.
Make sure the company that gives you advice around debt management plans and IVA’s are regulated and authorised by the FCA. There is a debt charity called, Step Change, who can also give you advice around these areas.
What costs are involved with a secured loan?
These are the typical fees you will have to pay when arranging a debt consolidation secured loan:
Valuation Fee – This would be paid upfront. The cost of this depends upon many factors such as whether a full internal valuation is required or just simply an online valuation, the amount you are looking to borrow and how much equity you have in your property.
Lender Arrangement Fee – This can be either a flat fee or a percentage of the loan amount. You may have the option to add this to the loan, however if you add the fee to the loan you will have to then pay interest on this and you will pay back more in the long run.
Broker Fee – This fee can vary from broker to broker. Your selected broker should clearly outline upfront what fees they would charge and when payable.
Consent – As a secured loan involves putting a charge against a property, the secured loan provider will need to get ‘consent’ from your existing first charge mortgage lender. Some mortgage lenders do charge a fee for consent. Your broker can advise you if there is a cost for this.
Your illustration from your broker should clearly outline all the fees and when they are payable.
Will a debt consolidation loan improve my credit score?
This type of loan can improve your credit score however it does take time to achieve this. Your credit score is impacted by:
Any Missed Payments – The more recent the missed payments the bigger the impact and any defaults/CCJ’s will also reduce your score, so where possible try to resolve these issues.
High Levels of debt – If you are constantly at the limit of your overdraft &/or credit cards it shows that you rely upon the credit to maintain your lifestyle, so cut back where possible.
Not on the Voters Roll – The credit agencies and lenders want to see a clear record of your name and address over a long period of time, so if you are not on the voters roll you should look into this.
No Active Credit – It can work against you if you do not have any active credit as you then cannot prove that you can manage credit.
How can I apply for a debt consolidation secured loan?
First step is to speak with a secured loan adviser from The Money Hub. You can do this by either calling the office or complete the enquiry from where you will then be able to schedule a suitable time for a call.
Second step is to get a copy of your credit report. We will require a copy of this and it is important that you are fully aware your current debt situation. We recommend you obtain a credit report from CheckMyFile which shows data from both Experian and Equifax credit agencies.