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Managing personal debts can be overwhelming, especially if you’re using multiple providers, and are trying to keep on top of different accounts with varying interest rates and repayment schedules. A second charge mortgage, often referred to as a secured loan, offers a way to simplify your finances by merging multiple debts into one. This can make it easier to manage payments and often provides you with an opportunity to reduce your interest rate.
Sounds good, right? It can be. But before jumping in, it’s crucial to understand the key aspects of personal debt consolidation so you can decide what’s best for you. In this post, we’re going to lay out the most important information you need to consider before taking out a new debt consolidation loan.
1. What is debt consolidation?
Debt consolidation involves taking out a new loan to pay off several smaller debts. Instead of keeping track of multiple payments, you’ll only need to focus on a single monthly payment to one lender. Debt consolidation loans can be a great way of combining credit card debt, car loans, overdrafts and other high-interest debts into one manageable payment.
2. How does debt consolidation work?
When you consolidate your debt, a lender issues you a new loan that covers the total amount of your existing debts. You then use this loan to pay off those debts. Going forward, you pay the lender issuing the consolidation loan. If you’re a homeowner, you could be eligible for lower interest rates by taking out a loan secured against your property.
The goal is to secure a lower interest rate than what you were previously paying, which can reduce the total amount you’ll pay over time.
3. What are the pros and cons of debt consolidation loans?
Like taking any loan, there are advantages and disadvantages to consolidating personal debt. Before you start speaking to loan providers or advisors, it’s good to give some proper thought to your individual needs and situation.
Pros 🎉
- Simplifies your debt repayment.
- Rates may be lower than those on credit card debt which could save you money in the long run.
- Fixed repayment schedules and rates can make budgeting easier.
- Can improve your credit score, especially if you’re consolidating credit card debt.
- Lowers your total monthly payment if you opt for long-term and/or lower-rate loans.
Cons ⚠️
- Can damage your credit score if you miss any loan payments.
- Your options may be more limited if you have a bad credit history.
- Risk of losing your collateral with a secured loan. If you use a Homeowner loan or HELOC for debt consolidation, you could risk losing your home if you default on payments. To find out more about secured loans click here.
- If you opt for a longer term to lower your monthly payments, it’s likely that you’ll increase your total cost of borrowing.
4. Set-up might be easier and more straightforward than you’d think
No two providers are the same (and we can’t speak for other people) but at Selina, we are used to simplifying complex processes digitally. If you’re eligible for one of our loans, we can save you a third of the time you’d otherwise spend waiting to access funds, and we do it without broker fees. If you come straight to Selina, you’ll find our arrangement fee is lower than most broker fees advertised in the market. Speak to a Selina advisor today.
5. There are different types of debt consolidation loans
- Personal loans: these are unsecured loans you can use to pay off your debts. The interest rate is based on your credit score and financial history.
- Balance transfer credit cards: some credit cards offer a low or 0% introductory interest rate for transferring balances from other cards. This can be an attractive option if you can pay off the balance during the promotional period, but beware; potential transfer fees, special terms and conditions require caution and management too.
- Home Equity Lines of Credit (HELOCs) and Homeowner Loans: if you own a home, you can borrow against your home’s equity. These loans have lower interest rates but they can put your home at risk if you fail to make payments. Learn more about Selina’s FCA-regulated borrowing options here.
- Debt management plans: offered by credit counseling agencies, these plans negotiate lower interest rates and combine payments into one. Whilst not a loan, they function similarly by consolidating payments but can cause you issues with obtaining credit in the future
6. Your financial habits are important
If overspending is a concern, simply consolidating the debt won’t solve your underlying problem. Before considering a loan, it’s essential to address any behavioural patterns that led to you accumulating debt in the first place.
7. It’s worth doing some research on your financial profile
To put yourself in the best position to make the right decision for you, we recommend running through this short checklist before committing to any provider, or loan.
- Assess your debt: list all your existing debts, including interest rates, monthly payments, and outstanding balances.
- Check your credit score: your credit history will influence the interest rate you can get on a consolidation loan. A higher score typically means better loan terms.
- Compare a few options: research different lenders and compare their rates, fees, and terms. Don’t just focus on the monthly payment; consider the total cost over the life of the loan.
- Create a budget: always make sure that you can afford any new monthly payments. If not, you may need to adjust your budget or reconsider consolidating your loans.
Final takeaways:
Debt consolidation can be a powerful way of regaining control of your finances, but it’s not a magic solution. It’s essential to understand the process, carefully evaluate your options, and be realistic about your ability to repay the loan. If you’re struggling with debt and considering consolidation, take the time to consult a financial advisor to explore the best approach
By taking these steps, you can make an informed decision about whether debt consolidation is right for you before setting yourself on the path to financial stability.
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Remember, if you consolidate your existing borrowing, you may be extending the term and increasing the amount you repay in total.
