Dont be insecure with debt consolidation

Former US president Bill Clinton reportedly arrived at the White House deeply in debt. But since handing over the reigns in Washington, he’s wiped out what he owed and accumulated nearly $40 million in the process, mainly through speaking fees.

Not all of us are fortunate enough to be able to rely on a lucrative lecture tour to pay off our debts. And none of us will need $40m to break even, either.

But with more than six million* of us consolidating our debts in the past three years, more and more Brits are struggling to get to grips with their money worries. In a bid to get their borrowing under control, around one in seven adults have borrowed more money to ease their financial problems with unsecured personal loans the most popular choice.

And we’re not talking about loose change here. The average consolidation loan is a hefty £13,000, and in many cases people are borrowing as much as £50,000 just to take control of their debt. MoneyExpert.com looks at the best way to sort out your unsecured debts…

The choices

Your options are straightforward. You can borrow money through a credit card, a personal loan, a home loan (or secured loan), or even through increasing the size of your mortgage. In each case the idea is simple – by putting all your debts into one place, you’ll be able to reduce your monthly outgoings and commit to paying them off.

Unsecured personal loans are more of a risk to lenders because strictly speaking there’s no guarantee that they’ll get their money if you don’t pay up. Cost-wise there’s not much to choose between an unsecured loan and a secured loan, although the unsecured versions do tend to have slightly cheaper rates. Monthly repayments on a £13,000 personal loan over three years at the lowest unsecured personal loan rate of around 5.9 per cent would be £393.99 a month.

Secured loans tend to be taken up by people with debts of more than £20,000 – you get to borrow more, but the pay off is that you secure the loan against your house. So if you miss repayments, you could lose your home. Unsecured loans generally involve shorter terms and therefore lower interest bills. Unlike credit cards you also are forced to commit to a repayment schedule.

The credit card option can be tempting because we’ve all got one and we all know how they work. But credit card providers only ask that you repay a small proportion of your balance each month and there’s no obligation to pay the money back over a set period of time.

And once that 0% deal expires, the standard interest rate will kick in and it’ll be your pockets that feel the difference most. In fact, if you do use a standard credit card to consolidate debts you are likely to be facing the biggest bills for sorting out the borrowing – average standard credit card rates are around 15.9 per cent.

If you are tempted to consolidate your debt into your mortgage, bear in mind that you’ll be paying interest for the life of the loan. For example, if you borrow an extra £13,000 at a rate of five per cent you would only pay £86.92 a month on a repayment basis – but over 20 years the total repaid would be £20,860.

A sensible option

Debt consolidation is sensible and a good way to get your finances under control if you owe money to different lenders at varying rates of interest. Theoretically you can reduce your monthly repayments and make your debts manageable.

However it only works if you accept consolidation as a wake-up call to get your borrowing under control and then work to become debt-free. It’s not a licence to borrow more money and get yourself deeper into trouble.

What’s the right deal for me?

There are so many options that you may need help finding the best deal for you. MoneyExpert can help you trawl the market for the best rates, based on how much you want to borrow and for how long. To find a suitable personal loan, mortgage or credit card, go to www.MoneyExpert.com for a simple way to consolidate your debts.

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