A secured loan for the purpose of consolidating debt is aimed at simplifying family finances and making monthly repayments more affordable. This loan can be used to put multiple personal debts under one roof, including overdrafts, hire purchase, small loans and credit card debt. Spreading payments over an extended term helps to reduce outgoings and free-up money for other household bills and expenses. Whilst a debt consolidation loan is available to those who have missed or made late payments, individuals with a good credit rating are likely to be offered the best secured loan deals.
How a Debt Consolidation Loan Reduces Monthly Repayments
Debt consolidation loans help to lower monthly repayments, primarily due to an extended repayment term and lower APR. The reduced default rate on secured loans mean that a creditor is prepared to provide a more favourable rate of interest and lend money over a period of up to 25 years.
- A £10,000 unsecured loan over 5 years at 8.9% will result in monthly repayments of £205.44.
- A £10,000 secured loan over 10 years at 8.9% will result in monthly repayments of £124.29.
The Effect of Consolidating Debt over an Extended Term
Whilst consolidating debt with a secured loan reduces monthly repayments, it increases the cumulative amount of interest paid over the term of the loan. Whilst the extended term is often marketed as a major selling point, long term loans are more beneficial to the lender than the borrower.
- A £10,000 unsecured debt consolidation loan over 5 years at 8.9% will result in a total repayment of £12,326.22. A total of £2,326.22 of interest will be paid.
- A £10,000 secured loan over 10 years at 8.9% will result in monthly repayments of £14,914.47. A total of £4,914.47 of interest will be paid.
The Perils of Consolidating Debt with a Secured Loan
Consolidating debt with a secured loan is regularly used to turn unsecured into secured debt. Whilst monthly repayments are often reduced, it gives creditors additional powers due to the provision of collateral. The overwhelming majority of secured loans are secured on property. Defaulting on the terms of the agreement can, in certain circumstances, lead to house repossession. Credit card debt is unsecured which means that a homeowner may be better-off with a Debt Management Plan (DMP) or Individual Voluntary Arrangement (IVA).
Consolidating debt with a secured loan reduces monthly repayments for individuals with a good credit rating. However, extending the term of any interest-bearing personal debt will increase the cumulative interest paid. Think carefully before turning unsecured debt into a secured debt consolidation loan.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
Asa Ghaffar - Asa has over 10 years of practical experience in loan approval, secured lending, bad credit repair, stock trading and debt management.
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