Roll up, roll up all your loans into one

Getting yourself out of a financial fix is getting trickier by the day.

Spooked by the worldwide credit crunch banks are slamming the door on many would-be borrowers.

Mortgages, credit cards and unsecured personal loans are all harder to come by than a few months ago.

They’re more expensive too – despite Bank of England reducing interest rates in December and February and a widespread belief that there will be another soon.

At the same time there are an estimated two million homeowners paying interest of between 10 and 15 per cent on money they owe.

These people are not in dire straits but their budgets are being increasingly stretched by rising petrol prices and gas and electricity bills.

They’re anxious to reduce their monthly repayments for debts which are likely to be a combination of credit cards, store cards and personal loans.

One way to do this may be a consolidation loan. This gives you the cash to pay off all your other debts and reduce the interest you’re paying.

Importantly for people who are too busy or just not very adept at juggling their finances they will have just one monthly repayment for a set sum to keep track of.

In the past consolidation loans have been expensive compared with other forms of borrowing, particularly unsecured loans.

They have also been costly to get out of if people’s circumstances changed and they wanted to repay early.

While the one big reservation remains – your home will be at risk if you fail to keep up the repayments – some of the other drawbacks are fading.

Fair & Square, for example, which is owned by Barclays has cut the penalty for repaying early to one month’s interest.

Fair & Square is offering consolidation loans at 6.9 per cent. This is not much more than the best unsecured personal loans which – in the current climate – will only be granted to those with flawless credit ratings.

So a £15,000 consolidation loan with Fair & Square will end up costing £20,652 over 10 years if the £950 arrangement fee is paid up front or £21,960 if it is added to the loan with monthly repayments of £183.

That compares with monthly repayments of £250 and a total bill of £30,040 to repay the same £15,000 with typical credit card interest of 15.9 per cent.

In the past, an alternative might have been to re-mortgage – borrowing against the equity in your property and using the money to repay the other debts.

While this may still be an option for some people, mortgage rates are not as attractive as they were. Arrangement fees have shot up and many banks and building societies are unwilling to lend more than 90 per cent of the property’s value.

In fact some lenders, including the Nationwide, are reserving their cheapest deals for low-risk customers borrowing less than 75 per cent of their home’s market value.
By contrast, some consolidation loan companies are still willing to make 90 to 100 per cent loans.

The other drawback with remortgaging – if your loan has a long time (15 years plus) to run you will end up paying a lot of interest in total.

The same £15,000 loan added to a home loan with 20 years left to run will end up costing £26,280 even if the interest rate is 6.25 per cent ie lower than the consolidation rate.

And homebuyers with fixed-rate loans would have to add up to £2,500 in fees to remortgage.

A personal loan may be a more attractive option for some people as these can be taken out over a shorter period.

But – legally – you can’t get an unsecured loan for more than £25,000 and only people with the very best credit ratings will actually be given the most attractive interest rates, particularly at the moment when banks are nervous about who they lend to and more cautious about the amounts they hand out.

So if you own a property and are worried that you may be losing a grip on your finances a consolidation loan could be a way of regaining control and reducing your monthly outgoings.

But don’t forget your home could be at risk if you don’t keep up the repayments so DON’T – whatever you do – just use it as a way to clear your credit card debt in order to start hammering the plastic again. If you have the slightest fear you may be tempted to do you must either cut up your credit card or ignore the rest of this advice. It’s simply not for you.

By Clinton Manning

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