The Basics Of Secured Debt Consolidation

Secured debt consolidation may be possible for you depending upon the results of your credit score. This will in large part be the result of you being a responsible borrower who is probably not over-extended.

The reason that these types of extra loans are known as secured debt consolidation is because they (the loan) is somehow tied to an asset that you own. Most often, this will be to your house.

Sometimes, it will be possible to use your current mortgage lender and recieve highly preferable interest rates, but often this just will not be possible.

Why not?

This will depend upon the size of your loan, the size of your mortgage and monthly repayments, and the value of your mortgage relative to the value of your property. The more highly leveraged your property is, the less likely your mortgage lender is to loan you extra funds.

As ever, with everything in life, there are different degrees of secured debt consolidation. Some lenders will offer loans to those that fall just marginally outside the main lenders criteria. This will probably be relatively safe, low risk lending, with the added bonus of a charge (or interest) over your property should you default. For this they will charge a higher interest rate than the main high street lender than you wanted to use but nothing too serious. Often, this interest rate 'loading' will be around 1% or so.

But, as your credit score and borrowing capacity fall, the risk of default to a lender increases. For this extra risk, they demand extra return. This extra return comes in the form of higher annual interest rates. These might be 2-3% pa higher than your hoped for high street deal. 2-3% may not sound like too much, but in a low interest rate environment (like now) that might make the loan 50% more expensive than the high street lender. This is the much more profitable end of the secured debt consolidation market.

Remember that with a secured loan, should you default, your house is at risk. Just because you owe a 2nd lender 10,000 but the main lender 150,000, does not mean that the second lender cannot remove you from your property and repay their loan and costs when they sell your house. You need to make careful decisions and think seriously about the consequences if you think there may be potential future a problem.

The actual mechanics are really quite simple. You will obtain a second loan on your property (the security) from your main lender or another down the foodchain and use the funds from that new loan to repay one or more of your other loans. If, for example, you are repaying a credit card debt, it may be possible to save 10% plus pa in your interest rate. This will obviously make a big difference to your monthly bills.

Don't do as many others do though ... don't forget to close your first account when you repay it. The temptation to increase your borrowing again after a secured debt consolidation is tremendous and can only lead to financial problems.