Securing a debt-free future

The old joke about "If you owe the bank £1,000 they’re in control but if you owe them £1 million you’re in control" might not go down too well with your bank manager but it’s definitely true.

Nowadays with Bank of England interest rates rising and banks getting tough on debts it’s definitely the banks in control and they are making it tougher to borrow.

If debt is a way of life for you, now is the time to break the habit.

You’re not alone – total debts in the UK are more than £1.1 trillion and each person in the country is reckoned to owe at least £4,400 each in credit cards, loans, hire purchase agreements and bank overdrafts.

The problem though is that millions of us owe a lot more than that and research shows many of us are feeling the strain. Around one in seven adults – about six million people – have had to borrow more to get their debts under control in the past three years.

On average they’ve borrowed a hefty £13,000 to pay off debts and get their payments into one manageable amount a month. And £13,000 is just the average – around 360,000 have had to borrow £50,000 or more to get their debts under control.

Consolidate and rebuild your finances

Anyone owing £13,000 to a range of creditors could benefit from putting all the debt in one place and making one monthly payment. Consolidating your debts should mean paying a lower rate of interest and sorting out a plan to pay off all that you owe.

If your debts are substantial – and £13,000 is a big chunk out of the annual average salary of around £24,000 – then it makes sense to pay the debt back over a longer period than offered by unsecured loan firms.

That is where the secured loan comes in very useful. These are loans separate from your mortgage which are secured against your house.

They are growing in popularity – research shows around one in seven of us who have consolidated debts in the past three years have used secured loans. That makes them fourth most popular behind unsecured loans, zero per cent credit cards and remortgaging.

Secured loan rates are falling

Average rates on unsecured loans for £25,000 are now around 7.15 per cent compared with rates as low as 5.9 per cent for secured loans. Firms such as Capital One and Paragon have cut rates.

Secured loan providers can afford to offer lower rates as they have the security of your house to lend against.

The lower rates on secured loans mean demand for them is likely to rise as rates for unsecured loan rates continue to edge up.

So secured loans are safe as houses?

The big risk with a secured loan is that if you don’t keep up payments you can ultimately lose your house.

And because you are borrowing over a longer period you will pay more interest and take longer to clear your debt. Generally unsecured loans are offered for only as much as 10 years while secured loans can last for as long as 30 years.

The advantage with spreading your payments over a longer period is that monthly repayments are lower but in the long-run you will pay more interest. Borrowing £75,000, for instance, over 25 years at 5.9 per cent will cost £140,000 in total. Monthly repayments though would be around £160 a month compared with £274 a month for the same loan over 10 years.

Selecting a secured loan

Consolidating your debts via secured loans will often be the best route for people with poor credit records. If you have had problems in the past the deals offered to you by credit card companies and unsecured loan providers will usually not be the best rates.

However you may still qualify for the better deals offered by secured loan providers as you will be able to offer the security of your house.

You may also be able to borrow more through a secured loan than through an unsecured loan. Unsecured loan providers are generally limited to £25,000 loans while secured providers will offer higher amounts.

Don’t throw away the security

Consolidating your debts should be time to turn over a new leaf and stop borrowing. You ought to clear your existing debts and use the cash to sort out your finances. It can make sense to borrow more than you need to clear your debts so you have extra cash available in case of a crisis.

However once you’ve consolidated that should be your cue to stop running up more debts. You don’t want to be consolidating again and again because the more you do the fewer options you’ll have.

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