Debt Consolidation Loan (Unsecured)

This is where the borrower takes out a new loan to pay off all of the existing loans. This loan is at a lower interest rate than credit cards, for example, and is paid off over a long period of time, hence the monthly payments are lower. Since this type of loan is not secured against a property the borrower does not need to be a home owner.

How it Works

Lenders make profit by lending money over a period of time and charging interest to the borrower for doing so. The larger the amount of money, and the longer the period of time, the more profit the lenders make. Hence a large consolidation loan (say £15,000), paid off over a number of years (say five or ten) is an attractive proposition to a lender as they will be able to earn a significant amount of interest.

In return for this commitment, they can offer a lower interest rate (e.g. 8.9%) than for example a credit card (e.g. 17.9%). This lower interest rate, combined with a longer repayment period means that the monthly payments of one consolidation loan can be significantly lower than the combined monthly payments on a number of smaller credit card debts and loans.

When it is Suitable

An unsecured loan can make sense for someone who has multiple high interest debts which are causing them to pay significant amounts in monthly payments. If they can afford to consolidate, and if the lenders are satisfied that they will reliably make the monthly payments, then this is often a suitable approach to resolving a debt problem.

Pros and Cons (compared to other debt settlement approaches)
Pros	Cons
Low affordable monthly payment Creditors paid off in full Stop chasing for payment, or legal action Credit rating not impaired Borrow more than unsecured consolidation loan Low interest rates if part of a mortgage	Property is at risk if repayments not kept up Availability depends on status Maximum borrowing up to 75-90% of value of property Interest costs over period of loan are still significant Risk that spending may continue on other credit cards etc.

What to Look Out for

Make sure the monthly payments are affordable. Complete a monthly budget exercise to see what funds are available each month after essential living items such as rent, bills and food, etc.
Interest rates on re-mortgages can be higher than normal if a credit rating has been affected by late payments.
Be careful not to continue to build up other types of debt such as credit cards and overdrafts. Some organisations suggest cutting up credit cards until the consolidation loan is paid off.

How to Apply

High street lenders offer competitive rates for personal loans. Current account holders should ask their banks for an offer.
There are also a number of useful resources on the Internet where users can search to find the best deals such as www.moneysupermarket.com
Alternatively, if a consolidation loan is not available Clear Start will be able to advice on and arrange a suitable alternative.

To talk to an advisor about a debt consolidation over £1,000 call 0800 954 6241, or complete the enquiry form.

To contact an advisor call 0800 954 6241. Alternatively complete an online enquiry form and an advisor will call you back at the time that you specify.