A debt consolidation loan allows someone to put loans and credit card debt under one roof and benefit from lower monthly payments. It is also possible to get a secured loan when bad credit exists. A bad credit loan means that finance is obtainable when a debtor has defaulted on a previous agreement.
Lower Monthly Payments
The payments are generally spread over more years which results in lower monthly payments. This can be of great assistance if financial problems exist and monthly outgoings need to be reduced.
Although lower monthly payments are of considerable benefit, more interest is paid over the loan duration. A £25,000 loan over 5 years at 17.9% would result in the payment of £13,008 interest. However, the same loan at just 7% over 25 years results in paying a colossal £28,008 interest.
Lower Interest or APR
The added security means that the borrower will benefit from a lower interest rate making monthly payments more affordable. If adverse credit exists, a debtor would have to pay a very high rate of APR if offered an unsecured loan.
Secured loans usually have a variable rate of interest. This means that the rates will vary at the lender’s discretion, which can throw out calculations.
Rejected For an Unsecured Loan
A credit rating may be so poor that it proves impossible to get an unsecured loan. This will be the case if someone has a CCJ registered against their name or have missed payments in the past. These customers are deemed a high risk so the only way to borrow money is through a debt consolidation secured loan.
Family Home is at Risk
Turning unsecured debt into secured debt isn’t usually a good option due to the higher risk. If considering consolidating a large amount of unsecured debt, one should consider an Individual Voluntary Arrangement first.
Early Redemption Penalty On a Secured Loan
Early payments towards the loan have a minimal affect on reducing the amount borrowed. Sometimes a borrower wishes to pay off some or all of the loan early and faces an early redemption penalty. This can amount to thousands of pounds.
There are a number of reasons why a secured loan may be the right choice, but one should always think carefully before securing debt on your home. If going ahead with debt consolidation, it is imperative that financial advice is sought before proceeding.