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Debt consolidation - The secured loan solution
Their are a number of ways to consolidate debts, here we are going to look at secured loans. Debt consolidation - the secured solution.
You are probably aware that a secured loan (also called a second charge) is financed against a property, usually your home so its a good idea to understand the pros and cons of consolidating debt with a secured loan. We have listed below the main points to be considered which should help you decide if this form of finance would be right for you.
Why do people consolidate debts with a second charge?
When looking to consolidate debts their are a few options available, the main choices are second charge, remortgage or unsecured loans. If people were
to look at the unsecured loan option they would probably find that unless they had a spotless credit file borrowing anything more than a couple of thousand pounds to be very difficult - even with a spotless credit file it is unlikely that a lender would borrow tens of thousands of pounds on a unsecured basis.
When you need to raise more than, say, £7,000 the most suitable option is secured finance, whether that be a remortgage or secured loan. The main reasons for this is that a lender would be more prepared to lend if they have a property as security as it means the borrower would be less likely to miss payments on the loan. A secured loan would typically be cheaper in the long run than an unsecured loan due to the fact that it is a less risky proposition due to the points mentioned above.
Is a secured loan better than a remortgage?
In many cases the simple answer would be yes. Mainly due to the fact that you would not have to repay your main mortgage (also called a first charge). By not having to repay the 1st charge mortgage you will not have to pay any redemption penalties that may apply. A secured loan will also complete quicker, usually within 4 weeks and their are no legal fees involved so applying for a secured loan is less expensive.
How much can I borrow with a secured loan? People usually go for second charges when they need to borrow around £10,000 or more. From our experience the most common secured loan amounts would be between £25,000 and £35,000 although second charge lenders can borrow up to as much as £100,000 this would be extreme however and most people would opt for a remortgage for this amount as typically remortgage's are cheaper than secured loans.
How will I know if a secured debt consolidation loan is right for me?
This would be dependent on your individual circumstances but in general terms it would be determined based on the amount you want to consolidate and the time you want to take to repay the loan.
for example
If you have £25,000 which you are paying at £350 per month and want to consolidate and at your current rate of repayment it would take 15 years to repay then it would not seem logical to consolidate this into a £25,000 secured loan over 15 years @ £370 per month. No one would want to do that.
In the main, if you can save money monthly and keep the term the same it may be worth doing, depending on your monthly saving it may be worth extending the term if the other option is missing payments on your existing commitments if you are overstretched.
For an in depth look at how much a debt consolidation secured loan will cost and to get comparisons for what you are repaying at the moment we would suggest speaking to a second charge broker who is able to work this out for you. With the correct information you can make an informed decision safe in the knowledge you had all the facts to hand.
