If you’ve got lots of different debts and you’re struggling to keep up with repayments, you can merge them together into one loan to lower your monthly payments.
You borrow enough money to pay off all your current debts and owe money to just one lender.
There are two types of debt consolidation loan
- Secured – where the amount you’ve borrowed is secured against an asset, usually your home. If you miss repayments, you could lose your home.
- Unsecured – where the loan is not secured against your home or other assets.
Secured debt consolidation loans
Debt consolidation loans that are secured against your home are sometimes called homeowner loans.
You might be offered a secured loan if you owe a lot of money or if you have a poor credit history.
You should get free debt advice before you consider taking out a secured debt consolidation loan, as they’ll not be right for everyone and you could just be storing up trouble or putting off the inevitable
Consolidating debts only makes sense if:
- any savings are not wiped out by fees and charges
- you can afford to keep up payments until the loan is repaid
- you use it as an opportunity to cut your spending and get back on track
- you end up paying less interest than you were paying before and the total amount payable is less (it could be more if you repay over a longer period).
Before you choose a debt consolidation loan, think about anything that might happen in the future which could stop you keeping up with repayments.
For example, what if interest rates go up, or you fall ill or lose your job?
If you can’t stop spending on credit cards, for example, because you’re using them to pay household bills, this is a sign of problem debt.