


Secured vs. unsecured debt consolidation loan

If you are looking to consolidate your debts, you have two main options. Secured loans are a popular way to consolidate debts as they allow you to release the equity on your home to pay off credit card, overdraft or personal loan debts.

However, many people also chose to use an unsecured loan to consolidate their debts. These are often more widely available and can be easier to arrange.

But, what are the differences between secured and unsecured debt consolidation loans? And which one is right for you? We explain.

What are secured loans and how do they work?

A ‘secured’ loan is a loan where you offer a lender an asset as security for the borrowing. For most debt consolidation loans the security will usually be your home.

Secured debt consolidation loans have several advantages. Firstly, secured loans (sometimes called ‘homeowner loans’) are less risky for lenders as they take a legal charge over your home as security for the loan. This means that secured loans are generally cheaper than unsecured loans.

Additionally, you can normally borrow a larger amount using a secured debt consolidation loan. Depending on the equity in your home you can typically use them to borrow from £3,000 up to around £100,000 and you can frequently take the loan over a longer period of time, reducing your monthly repayments.

However, secured loans are riskier than unsecured loans from your point of view as you could lose your home if you fail to keep up your repayments. In addition, some secured debt consolidation loans have variable interest rates and so your repayments could rise in the future. And, you may find that a secured debt consolidation loan will come with various arrangement fees and other charges.

What are unsecured loans and how do they work?

A popular alternative to a secured loan is an unsecured debt consolidation loan. This type of loan is simpler than a secured loan as it doesn’t involve providing any collateral as security for the borrowing.

When you take out an unsecured debt consolidation loan you borrow money from a bank or another lender and agree to make your regular payments until the loan is paid in full.

The main advantage of unsecured loans is that they are often easier to arrange. In addition, if you fail to keep up repayments to the loan your home is not at risk. The lender may go to court to try and get its money back and your credit rating may suffer, but the lender can’t take possession of your home if you don’t pay.

However, interest rates on unsecured loans may be higher than secured loans and the loan terms tend to have a maximum of around 7 years. This may mean your monthly repayments are more expensive than they would be on a secured debt consolidation loan.

Which type of loan is right for me?

Your personal circumstances will dictate which type of loan is the best for you.

If you have equity in your home then a secured loan may be more appropriate although you should shop around and compare loan rates and terms on offer. You should also speak to your current mortgage lender (if you have one) to see what they may offer to you.

If you intend to clear the loan in a shorter time or you aren’t a homeowner, an unsecured loan may be best. Again, you should compare the cost of loans between various providers in order to make sure you get the best deal.

Make sure you examine both unsecured and secured debt consolidation loans before you sign up.
