Debt consolidation involves taking out a new loan to pay off several existing debts, leaving you with just one monthly payment to manage. This is most commonly done using a secured loan (such as a second charge loan) or by remortgaging, where the outstanding debts are rolled into a single borrowing facility secured against your home.
The main advantage is simplicity: instead of juggling multiple payments to different creditors at various interest rates, you have one payment at one rate. Because secured loans typically carry lower interest rates than credit cards and personal loans, your monthly payment may be lower. However, spreading the debt over a longer term — which is common with secured consolidation — can mean you pay significantly more interest in total, even if the monthly cost is less.
It is crucial to understand that consolidating unsecured debts (such as credit cards) into a secured loan means your home is now at risk if you cannot keep up repayments. This is a significant escalation of risk that must be carefully considered. A qualified mortgage adviser can help you weigh up whether consolidation is right for your circumstances.
You have three debts: a credit card with £8,000 at 22% APR (£220/month minimum), a personal loan of £5,000 at 9% (£152/month), and a store card of £2,000 at 29% (£80/month). Total: £15,000 across three debts costing £452/month. You consolidate into a second charge loan of £15,000 at 6.5% over 10 years. Your single monthly payment is £170, saving £282 per month. However, you pay £5,400 in total interest over 10 years, whereas the original debts might have been cleared sooner.
Key Points
- Combines multiple debts into one single monthly payment
- Can be done via remortgage, second charge loan, or unsecured loan
- Monthly payments are often lower, but total interest may be higher
- Securing previously unsecured debts against your home adds risk
- Professional advice is recommended to assess suitability