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Are debt consolidation loans secured against your property?

If you are trying to take control of your debts then you will probably have considered a debt consolidation loan. Rather than making multiple monthly payments to various credit cards, loans and store cards, a debt consolidation loan allows you to repay your debts, leaving you with one simple, affordable monthly repayment.

There are many advantages to consolidating your debts using a loan. However, all debt consolidation loans are not the same. Some are secured against your property while some are available on an unsecured basis. Here, we look at the different types of debt consolidation loans that are available and examine the pros and cons of each.

Secured vs unsecured debt consolidation loans

If you want to consolidate your debts, unsecured loans and secured homeowner loans are two of the best ways to raise the cash that you need. Indeed, an Office of Fair Trading report has stated that ‘debt consolidation appears to be the single most important reason given by consumers for obtaining a loan’. In 2011, a leading loan company also revealed that debt consolidation was the most popular reason given by borrowers for personal loan applications in 2011.

A secured debt consolidation loan allows you to borrow using the equity in your home. You can typically borrow between £3,000 and £100,000 in order to repay your other loans, credit cards and store cards. You then pay back the loan over a term of your choosing – often up to 25 years.

It is called a ‘secured’ debt consolidation loan as the lender takes a legal ‘charge’ over your property. This means that your home is at risk if you fail to keep up repayments on your loan.

An unsecured debt consolidation loan does not require you to provide any security. It is generally for a smaller amount than a secured debt consolidation loan and you will typically pay it back over a shorter period of time. Whilst your home isn’t at risk if you fail to pay your unsecured loan, your credit rating could be damaged and a lender can pursue you for unpaid money through the courts.

Pros and cons of a secured debt consolidation loan

There are various advantages to secured loan above an unsecured loan. Firstly, a secured debt consolidation loan may be more suitable if you need to borrow a larger amount of money or if you want to pay the loan back over a longer period of time. You can often borrow up to £100,000 on a secured debt consolidation loan over a term of up to 25 years.

In addition, secured debt consolidation loan rates are often lower than unsecured loan rates. This is because the loan is less risky to the lender as they have a legal charge over your home as security for the debt.

Finally, if you are self-employed or if you have a less than perfect credit rating, you may find that it is easier to agree a secured debt consolidation loan. This is because unsecured lenders are increasingly choosy about who they lend to and you could find it hard to gain an approval for such a loan if you have poor credit or are unable to prove your self-employed income.

Pros and cons of an unsecured debt consolidation loan

While there are many benefits of a secured debt consolidation loan, unsecured loans also have several advantages.

Firstly, unsecured debt consolidation loans tend to be more suitable if you want to borrow a smaller sum over a shorter period of time. This can help you to leave yourself debt free sooner and you will pay less interest in total.

Additionally, as the lender does not take your property as security, you also benefit from the peace of mind of knowing that your home is not at risk if you are suddenly unable to make your loan repayments.

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