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Is a homeowners loan the best way to clear credit card debt?

According to research from Credit Action, Brits have over £55 billion of credit card debt. The average credit card debt in the UK is around £2,250 and so it is no surprise that more and more people are clearing their credit card debts. A report from PricewaterhouseCoopers found that each household paid off an average of around £355 of their unsecured debt in 2011.

If you want to clear your credit card debt, there are various options available to you. A popular way to repay credit card borrowing is through a homeowners loan (sometimes called a ‘secured debt consolidation loan’). Here, we look at what these loans are, some pros and cons of using them to clear your credit card debt and some of your alternative options.

What is a homeowners loan?

A homeowners loan is a loan that is secured on your property. Sometimes called a ‘home equity loan’ or ‘secured debt consolidation loan’, it allows you to borrow against any equity that you have in your home.

You can typically borrow between £3,000 and £100,000 and pay it back over a term of your choice – normally up to 25 years. The actual amount you can borrow will depend on factors such as the equity in your home, your income and your credit rating.

The loan will be secured on your property. This means that the lender will take a legal ‘charge’ over your home, meaning that your property will be at risk if you don’t keep up your repayments.

Advantages and disadvantages of using a homeowners loan to clear your credit card debt

Many people use a homeowner loan to repay their credit card debt. There are several reasons that such a loan is suitable.

Firstly, homeowner loan interest rates tend to be lower than credit card rates. The Daily Telegraph reported that the average credit card interest rate in the UK in March 2012 was 17.3 per cent – an 11 year high. As a homeowner loan is less risky to a lender – because they have your property as security – the interest rates are generally lower. And, lower interest rates mean that you will pay less interest.

Homeowner loans also let you spread your repayments out over a longer period. This means that you can reduce the amount you are paying out each month when compared to the credit card payments you were previously making. You should bear in mind, however, that you may pay more interest in total as you are taking the borrowing over a longer period.

Another reason to consider a homeowner loan to consolidate your credit debt is that it will simplify your finances. Instead of making multiple minimum payments to a range of cards and creditors, a homeowner loan leaves you with one creditor and one manageable payment every month.

One factor to consider is that taking out a homeowners loan to repay credit card debt will mean that you are securing the debt on your home. Lenders cannot repossess your home if you don’t pay your credit cards but they can if you don’t pay a homeowner loan.

While a homeowner loan can be a great way to clear your credit card debt, you do have other alternatives, as we see next.

Other options if you want to clear your credit card debt

  1. Unsecured loan. An unsecured loan typically allows you to borrow a smaller sum over a shorter period. This can help you reduce your interest payments and clear your debt more quickly. However, if you are self-employed or you have experienced credit issues you may struggle to be accepted for a personal loan.

  2. Remortgage. A remortgage lets you switch your main mortgage from one lender to another and, potentially, borrow some additional funds to repay your credit cards. Getting a remortgage will depend on many factors including the value of your home, your income and your credit rating. It may also be more expensive than other forms of lending as there may be fee and charges to pay.

  3. Credit card balance transfer. If you have one or more credit card balances which you are paying high rates of interest on you can switch them to a card which offers a 0 per cent introductory rate on balance transfers for several months. Other cards offer a low rate of interest for the lifetime of the loan.

  4. Using savings/investments. If you have savings or investments it may be beneficial for you to repay your credit card debts with this cash. Savings rates are generally lower than credit card rates and so you save money by using spare cash to reduce your debt.

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