Protection Insurance :: Debt consolidation with secured and unsecured loans

Debt consolidation with secured and unsecured loans

All consumers will have a credit score that is dictated by their financial history. A credit score is used by lenders to decide whether a consumer is a 'high-risk' or a 'low risk' borrower. This directly affects the chance the borrower obtaining good or bad rates of interest on things such as loans, mortgages and credit cards. The poorer a credit rating, the higher the rate of interest the consumer will be charged. Conversely, a better credit rating is likely to mean lower interest rates.

A credit rating is a reflection of a borrower's ability to make payments on almost any financial commitment - from credit payments to mortgage fees. The deeper in debt, the less likely to be able to meet the repayments a consumer becomes, the worse their credit score is likely to be and the less likely they are to be able to escape the spiral of debt.

It is possible to improve a bad credit score with canny financial planning; the aim should be to honor all outstanding debs. If their credit rating is improved the borrower will represent a decreased risk to lenders, meaning that their potential for lower-interest borrowing rates is increased. Home-owners can pay off debts using home equity, thus reversing their credit ratings and, hopefully, making life easier in the future. They do this using either secured loans or unsecured loans.

A secured loan is directly related to a consumer's home. The loan is 'secured' against the borrower’s home meaning that, if the borrower becomes unable to pay back the loan, the loan can be reclaimed from the selling of the house.

Because these loans are secured they will mostly be cheaper to manage. There is also the potential to borrow larger sums if your house is being used as collateral and also the potential for the consumer to borrow the money over a considerable length of time e.g. 20 years. Thus, the interest rates attached to this form of loan are comparatively low (Secured Loans from Asda Finance for instance can be stretched over 240 months at an APR of 7.6% meaning you’d pay £795.76 a month - £191,277.40 in total - on a £100,000 loan). However, the possibility of repossession represents a considerable risk.

Conversely, the risk associated with unsecured loans is increased for the lender because the loan isn't secured against the borrower's home. As a consequence, lenders tend to offer substantially higher rates of interest, the amounts to borrow can be much smaller and the length of time that the money can be borrowed for can be a lot less. There is also a minimal risk that the house can be repossessed in rare circumstances, although, statistically, this is extremely unusual.

If you're considering taking out a loan it's prudent to first have a look at loans calculator such as the one on the Asda Personal Loans website, there will be something similar on most loan provider's websites. These calculators will help you to work out how much you can realistically afford to borrow and what sort of repayment arrangement would best suit your situation.

Before embarking on either of these paths it is worth contacting a Debt Counseling Service. These services offer useful advice on managing your finances are free and try to manage the situation so that someone in debt and/or with a poor credit history can try and consolidate their debts without risking their home.

If your credit card debt is getting out of control its worth scouting round for a better deal that might at least save you some money in the short term, good balance transfer rates should be a priority – there’s no shortage of 0% on balance transfer cards to pick from - the Natwest credit card offers a particularly good deal with 0% on balance transfers for 13 months, a 2% balance transfer fee and 0% on purchases for 3 months. For an up to date overview of the best offers it's a good idea to check out one of the many credit card comparison sites like Moneysupermarket or the credit cards centre at fool.co.uk.