Yes, a secured loan is very commonly used as a way to consolidate debts. This involves using your home or flat as security to unlock a large sum e.g £10,000 or £30,000 and using this loan to repay all your existing debts into one more manageable, affordable loan.
Many consumers find themselves taking on multiple credit cards, personal loans, car payments and more – but looking after all these payments becomes unmanageable, especially if you start to default on these and the late fees start to pile up.
But if you want all these debts paid off quickly and to have the companies stop hassling you for payment, you can use a debt consolidation loan to pay off all these outstanding bills – and then you just have the one debt consolidation loan with one lender to pay off. This can be secured, because if you are in debt, it may be hard to borrow £10,000 or £50,000, but using your home as security, this may help you access larger sums.
This guide takes you through what a secured loan is, whether you can use it consolidate your debt and what the benefits of doing such as thing would be.
What Is A Secured Loan?
A secured loan is a loan where your lender will take legal charge over an asset of yours (a property, a car etc..) in order to protect the money that they lend you.
Whether for your business or your personal life, a secured loan can sometimes be a great way to get the money you need quickly. However, it is important to be aware that if you were to fail to repay your loan payments on time, then this asset could be repossessed by your lender.
A secured loan can be taken out on your property even if you have a mortgage and these can often be called second charge mortgages.
The interest rate on a secured loan like this would be slightly higher than your mortgage. This is because if you were to default on a second charge loan then the first charge lender would get the equity of the house owed and the second charge would be left with the rest.
Can I Use A Secured Loan To Consolidate Debts?
Yes, you can use a secured loan to consolidate your debts. Using a secured loan to consolidate your debts might even be a better idea than using a debt consolidation loan. For some, it may be that they need to consolidate a number of business debts and unexpected costs.
It may be the case that on top of existing costs and debts that there has been a cybersecurity breach which cost a business a lot more money than they expected (source: Lucidica), leaving them with high levels of debt. Or perhaps a company that needs to buy extra stock for a busy period of the year; even though they have outstanding debt. Secured lenders will often take a view and consider all cases when it comes to secured loan options in the UK.
For those who have a bad credit rating, taking out a secured loan will be easier as the lender knows that their money is secured by your asset. This can allow you to borrow more money to effectively consolidate your debt.
It is important to be aware that unlike a debt management provider, you will not be told where to spend your secured loan money. Therefore it is up to you to budget and plan well and make sure you know which debts need to be paid off first to ensure good debt consolidation.
It is always wise to pay off the loans with the highest interest rates first because these will be the most expensive in the long-run.
What are the benefits of using a secured loan for debt consolidation?
There are many benefits to using a secured loan for your debt consolidation instead of a different type of loan such as a personal loan. Here are some of the reasons why it might be worth using a secured loan to consolidate your debt:
- Lower Interest Rates – Secured loans typically have much lower interest rates than other types of loans because the lender can be assured that they are getting their money back so less risk is involved.
- Borrow Larger Amounts – You can also borrow much larger amounts of money when it comes to secured loans because your loan will be connected to the value of the asset that you use to back the loan. The more equity you own in your house the larger the amount of money you can get. This can help if you have lots of debt you need to repay.
- Can Get With Bad Credit – It is much easier to get a secured loan even if you have bad credit. This is because lenders are more willing to trust you when you have backed the loan with your asset. If bad credit is stopping you from consolidating your debts then consider using a secured loan.
- Can Decide What To Do With The Money – Unlike debt consolidation loans or debt management loans, when you get the money for your secured loan you can decide what to do with your money. If there are certain bills you would rather pay off first because you keep forgetting them then this is possible with a secured loan.
- Easier To Be Accepted – As mentioned, it is much easier to be accepted by the lender when you apply for a secured loan than for a personal or unsecured loan. This way you can be sure that you can consolidate your debts without having to make multiple loan applications.
- Longer To Make Repayments – Secured loans are usually longer term loans rather than short term allowing you more time to make your repayments over a period of months and years rather than weeks.
Why should I consolidate my debt?
There are few good reasons why you should consider consolidating your debt. Some of the benefits of debt consolidation include:
- All of your debt is in one place – When you consolidate your debt, all your debt is put into one place rather than a myriad of places. This can help you organise your finances more and effectively budget for the month knowing that the debt is simply coming out of one place.
- No longer chased by different lenders – It can be annoying to be constantly getting emails, phone calls and more from a number of different lenders. By doing some debt consolidation you can limit the amount of lenders that are chasing you, making borrowing money a less hassling process.
- Systematic way to become debt free – Doing debt consolidation or debt management is one of the best and most systematic ways to become debt free. It helps you to understand where your debt is coming from and allows you to make sure your one debt will always be paid. Hopefully ending in you being debt free.
- Do not have to worry about miss repayments – With debt consolidation you can worry less about missing repayments because you forgot money was coming out of a certain account. This can help you hold onto your assets that you have used for secured loans such as homeowner loans and allow you to worry less about your financials during the month.
- Can help build your credit score – Lastly, doing debt consolidation can be a great way to build your credit score. Paying off many debts and moving into one payment which you make sure you repay every single month is a sure way to increase your credit score quickly and can help build back your credit report if it is weak.
