With more and more people falling into financial debt, the process of debt consolidation is becoming equally as common.
With many UK adults owning at least two or three credit cards, it is no surprise to see credit card debt on the rise. Many credit card users are unable to keep up their minimum monthly repayments, resulting in ever-increasing interest rates and late payment charges, as well as long-term credit record damage.
Such issues combined with any other monthly outgoings can make debt consolidation seem like a very appealing option.
The process of consolidating multiple debts into one, manageable monthly outgoing is made possible through the facilitation of a secured loan. This means that any outstanding balances on credit cards, overdrafts, unsecured loans or store cards can be rolled up and secured against the value of the borrower's home.
Although securing debts against ones home can be a risky option, it generally makes monthly outgoings far more manageable.
For instance, suppose you have an outstanding credit card balance of £1,000 at an annual interest rate of 20%, you would be paying £16.66 in interest for every month that the balance remains outstanding.
Admittedly, this is a rough calculation, as you are required to make a minimum payment on most cards, which would in turn reduce both your debt and future interest payable on it.
If however, you consolidated this debt, with the use of a secured loan at a rate of 9%, you would be only paying £7.50 worth of interest each month. Therefore, by consolidating your debt you are saving £0.16 a month in interest each month.
Again, it should be pointed out that this is a "flat rate" and therefore the same level of interest is payable every month, unlike a credit card where interest owed would fall.
Low loan rates are made possible by borrowers' collateral, usually their home, or sometimes an expensive car, motor home or boat. The added security allows the lender to offer far lower rates of interest compare to that of unsecured loans or credit cards.
Great care has to be taken however, as if the borrower defaults on this loan, the lender will have the legal right to reposes the collateral. It is therefore vital that before signing the dotted line, careful consideration is taken to ensure that the required monthly repayments can and will be met.
Liam is a UK based financial author, currently focusing on secured loans, an the role that secured loans can play in consolidating debt. Compare over 150 secured loans online today.
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