If you have found yourself in a position and are considering debt consolidation, you may be feeling extremely worried about your financial future and the large amount of debt that you have accumulated.
Debt consolidation is one of the many options for any individual who is looking to get out of financial trouble. In this guide, we will explain everything that you need to know about taking out a debt consolidation loan so that you can determine whether or not this is the right step for you.
Debt consolidation is a term that is used to describe a specific type of loan that people use to pay off all of their other unsecured debt.
Debt consolidation can be a great option for individuals that have debts over £25,000. It is suitable if you have a number of different debts coming from different directions, for example, overdraft debts, loan repayments, and credit card debt.
Taking out a debt consolidation loan is attractive because it means that you are only going to have to pay one monthly payment rather than having to pay several monthly payments to different lenders to cover your debts. This makes it a lot easier for you to manage the debt that you are paying off and it makes the process much more straightforward.
However, it is important to recognise that this is still a loan and, therefore, it is not the best solution for everyone. Taking out this type of loan could put you in a worse financial situation than you are right now. This is why you need to think carefully before going down this route.
Determining whether a debt consolidation loan is right for you
If you are finding all of your repayments overwhelming and you are constantly being charged late payment fees, then you should definitely look into the prospect of taking out a debt consolidation role. However, there are a few things that you do need to be mindful of when taking out this type of loan.
The first thing that you need to keep in mind is the fact that you are likely going to be forced into paying a very high-interest rate on this loan. At the end of the day, if you have a number of debts and you have missed payments on these debts, it is likely to have impacted your credit rating and, therefore, the loans that you will be offered will be high-interest rate loans.
It is also important to recognise that this can make the total sum of your debts greater than it is right now.
A lot of people find that they are able to reduce the monthly payments they make through consolidating their debts, however, they are going to be paying off their loan for a much longer period and, therefore, it means that you will be in debt for a longer amount of time and you will end up paying more money back in total.
If you are going to apply for a debt consolidation loan, you should always find out how many payments you are going to need to make over the lifetime of the loan, as well as how much you are going to have to pay off each month. You need to have a clear picture of exactly how much this loan is going to cost you and indeed whether it is going to be the right solution for you.
As is the case when borrowing any type of money, you also need to consider all of the debt consolidation fees that could be charged.
A lot of the debt consolidation loan businesses out there today charge fees and these are added onto the amount of money that you are borrowing. This increases the amount of money that you are paying back and it can also increase the length of time that it takes you to pay back the loan, so this is definitely something worth thinking about.
Different types of debt consolidation loans
Essentially, a debt consolidation loan can be split into one of two categories: secured loans and unsecured loan.
Secured Debt Consolidation Loan
A secured loan is a type of loan that will be secured against your property.
If you are a homeowner, you will be able to take out a secured debt consolidation loan and this is essentially like taking out another mortgage. These are often known as homeowner loans or 2nd charge mortgages.
It can be attractive to a lot of people because it enables them to borrow more money than they would be able to if they were not putting up their house as assurance.
Read How John & Sarah Benefited from Debt Consolidation
It is also attractive because it is often a lot cheaper when compared with unsecured loans because lenders have the peace of mind that they will be able to take your property if you do not pay the loan back.
Therefore, this is where the great risk also comes from. If you are not able to pay your loan back, the loan company could sell your property to cover your debts.
When taking out this type of loan, you need to be certain that you can make the monthly repayments comfortably.
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Unsecured Debt Consolidation Loan
The second type of debt consolidation loan you can take out is an unsecured loan. This is also referred to as a personal loan.
The difference with this type of loan is that you will not be putting any of your assets on the line. If you do not make the loan repayments, the lender will not be able to repossess your home.
However, if you are struggling with your finances and you do not keep up with the payments that you have committed to this will, of course, have a negative impact on your credit rating.
Other Debt Consolidation Options
As mentioned earlier, a debt consolidation loan is not the only option out there for individuals who are in financial trouble. There are a number of other solutions you can consider, and we will look at some of these below.
Debt Management Plan
The first option is a debt management plan, which is often shortened to the DMP.
This is suitable for individuals that have some money left over at the end of every month but do not have enough money left to pay all of their debt.
With a debt management plan, a debt management company would draw up a proposal for all of your creditors and this will ask them to accept reduced payments. They will also ask for any charges and interest to be stopped.
Of course, you need to account for the fees that can be charged for a service like this, and there is always the chance that your creditors will not agree to the proposed plan. This means you will still be sent payment orders and you could have further court action taken against you if you don’t pay these.
Individual Voluntary Arrangement
Another solution is an individual voluntary arrangement, which is abbreviated to IVA. This is a legal process for individuals that have unsecured debts amounting to a few thousand pounds or more.
With this sort of debt solution, an insolvency practitioner will arrange the agreement by helping you and advising you throughout the process. They will take a look at your current financial situation and they will draw up proposals for all of your creditors.
With this sort of arrangement, your available income is used so that you can make monthly payments towards your debt that are affordable over a period of time, and this period of time is typically around the five-year mark.
Not only this, but you can pay a lump sum towards your debt if you are able to do so.
Once you get to the end of the agreed periods, then all of the debts are remaining will be written off.
For an IVA, creditors that represent at least 75% of your debt must vote in favour of this. When they do this, this means that they agree to take no further legal action against you to recover
Debt Relief Order
You could take out a debt relief order, which is suitable for individuals who have debts amounting to less than £20,000 and they don’t have any more money than £50 left over every month once they have paid for their essential living costs.
With a DRO, you are usually freed from your debts after one year and creditors cannot recover their money without the court’s permission. You will only be granted a DRO if the following applies:
• You have not applied for a DRO in the last six years
• You have lived or worked in England and Wales in the last three years
• You have less than £1,000 worth of assets (which, of course, means you can’t be a homeowner)
• You have less than £50 a month spare income
• You owe less than £20,000
• Filing for bankruptcy
• You can also file for bankruptcy, which is a legal procedure for anyone who cannot pay their debts within a reasonable frame of time.
Declaring for bankruptcy is not a decision to take lightly. However, if you cannot pay any of your debts back, it may be the only option.
To file for bankruptcy, you would need to fill in a form on the UK Government website, which ironically costs £680. This will show on your credit report for six years, meaning you will find it extremely difficult to take out credit. Plus, if you own a home, you may be forced to sell it, as well as selling some of your possessions.
Choosing the right debt solution for your needs
Ultimately, the solution you choose will come down to your own personal situation. It all depends on the debt that you currently have, how they are spread across the monthly, and how much money you have coming in on a monthly basis.
This is why it’s always a good idea to talk to an expert who is transparent and will give you their opinion regarding the best solution for you.
Home Owner Loans / 2nd Charge Mortgages
At trufe. we always aim to look source the most effective financial solution for our customers, providing independent honest, straight forward advice and guidance where possible.
We tend to find that debt consolidation through a second mortgage for individuals who have over £25,000 of unsecured debt is a sensible solution, but everyone’s circumstances are different.
As discussed in this article, there are advantages and disadvantages to this course of action. Your home may be repossessed if you do not keep up repayments on a loan or mortgage secured upon it.
If you own a home and a debt consolidation loan sounds like it could be a suitable solution, please contact us using the form below and after an initial consultation, we will search the whole market for a suitable solution.