Debt Consolidation Or Debt Management? Let's End the Confusion

When faced with a client suffering from a large amount of unsecured debt, most Mortgage brokers and advisers are likely to offer a debt consolidation loan or a re-mortgage as a viable solution to the client's debt problems. But does this constitute a good debt management solution and is it best for the client?

Firstly, we need to understand the difference between secured and unsecured lending. A secured debt such as a mortgage or secured loan is a debt borrowed against an asset - e.g. your home, car, or other property. This gives the lender more security in the knowledge that they can claim back the asset if the debt remains unpaid. An unsecured debt is not borrowed against any asset, making it a higher risk for the creditor. However, if you own a property the creditor can apply for a charging order to secure the debt on it. Because of this, unsecured loans may have higher interest rates and are potentially more expensive.

If you own a property and have a large amount of unsecured debt, then you may be tempted to consolidate your debts with a secured loan. The headline interest rates can be lower, and the lender may claim to reduce your monthly outgoings by a considerable amount.

However, it is not a decision to be taken lightly, and there are several points to consider. Consolidation loans tend to be paid over a longer period, so although the headline interest rate is lower, you may end up still paying the same, if not more over the term of the loan. It is also vital that you check the terms and conditions of your current debts, to make sure there are no redemption penalties. Large redemption penalties on your loans may mean that by consolidating your debts you could potentially pay the interest on them twice!

The most important thing to consider is whether you are comfortable with securing your debts to your home. Take stock of how you got into debt in the first place and detail your incomings and outgoings. Your home may be at risk if you do not keep up repayments on your new consolidation loan, so it's important to be sure that the repayments are at a level you can afford.

Before commencing any form of debt management, whether it be debt consolidation, a debt management plan, an IVA or bankruptcy, it is important to consider all of your options and seek advice on the best route for you.