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When you use your home to consolidate debt which is better - lower amortization or lower payment?

If you are considering a debt consolidation loan, one of your main decisions will be the length of the loan. You want to ensure that you repay the loan as quickly as you can but you also need to ensure that the monthly repayments are affordable to you.

So, which is best? Do you choose a shorter repayment period in order to repay the loan more quickly? Or, do you take the loan over a longer period in order to keep your monthly repayments low? We examine both options.

Your choices when using your home to consolidate debt

Using your home as security for a debt consolidation loan can have several benefits. Firstly, interest rates on secured loans are generally lower than on other types of borrowing. So, if you are using a debt consolidation loan to repay credit card or personal loan debt, you are likely to pay less interest.

Secondly, a secured debt consolidation loan can help you to simplify your finances. Instead of multiple payments to various creditors, you can repay all your debts and leave yourself with one simple, affordable monthly repayment.

When you take out a debt consolidation loan, you will have a choice of what term (the number of years) to take the loan over. A number of factors will affect this decision, including your age, your income and the resultant monthly repayment. Many people choose to take the loan over a long period in order to reduce their monthly repayments. However, others prefer to clear the loan as quickly as they can.

The decision you make will be based on your personal circumstances. However, here are some factors to consider when deciding whether to opt for a shorter loan term or lower monthly repayments.

When a lower amortization is better

‘Lower amortization’ means a shorter loan period. The main reason to choose a shorter amortization period is that you will pay off the loan more quickly. And, since you have agreed to pay off the debt consolidation loan in a shorter period of time, the interest you pay over the life of the loan is therefore greatly reduced.

While your monthly repayment may be higher, lower amortization means that you will be debt free sooner, and you will pay less interest over the term of the loan.

When you choose a short loan term, you also have the advantage of building equity in your home sooner. Equity is the difference between any outstanding borrowing on your home and its market value. If you choose a shorter loan term you will repay the loan faster, meaning you will build up the equity in your home more quickly.

Finally, taking your loan out over a short period means that once the loan is paid off, the lender relinquishes their legal charge on your home. This means that your home is no longer at risk of repossession if something unforeseen were then to happen.

When a lower payment is better

While everyone wants to pay off their debts as quickly as they can, there are sometimes advantages to choosing a longer repayment period.

The main advantage of choosing a longer amortization period is that your monthly repayments will be lower. As you are spreading the loan over a longer period, you will pay less every month than you would by taking the same loan over fewer years. This will help you if your income has fallen or if you are struggling to balance your monthly income and outgoings.

Taking out your debt consolidation loan over a longer period initially may also help you to get your finances in order. You may then be able to increase your payments and reduce the term of the loan at a later date.

However, if you decide to take your debt consolidation loan over a longer period, you should be aware that you will pay more interest in total. In addition, it will be longer before you are debt free and the equity in your home will build up more slowly.

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