If you are keeping track of several debts and you would like the chance to lower your monthly expenditure or just make your finances easier to manage, a debt consolidation loan could help you do that.

By using a new loan to repay your existing unsecured debts, you’ll combine all your debts into just one – meaning you’ll have just one payment to make each month, to one creditor.

What type of loan can I actually use to consolidate my debts?
On the surface, a ‘debt consolidation loan’ is just like any other loan – whether it’s secured or unsecured – even if the lender does ask you to state what you want to borrow the money for.

However, the type of debt consolidation loan you take out will have an effect on other things – so it’s important you are aware of and understand each type of loan before making your final choice. (If you don’t own property, though, you won’t have the choice of securing a debt against the property you’re living in.)

Secured debt consolidation loan (homeowners only)
Basically, if a loan is secured, it means you have a valuable asset (usually your home) placed as security against the loan. This means the lender is taking fewer risks when lending you their money, and as such, you may be offered a lower interest rate and a longer repayment term than you might be offered if you opted for an unsecured debt consolidation loan.

Of course, the drawback to this is that it is secured against your home. If you miss payments, your home may need to be sold so you can repay your debt. This is something you’d need to think about very carefully before you went ahead.

Unsecured debt consolidation loan
Unlike a secured debt consolidation loan, an unsecured consolidation loan doesn’t have anything placed against it as security.

This may seem like the ’safer’ option, but the consequences of missing your payments would still be serious:

• Your credit rating will be damaged – which will affect your ability to obtain the best deals if you try to borrow money in the next six years.
• You may face legal action from your creditors if you continue to miss payments.

Note: arranging to repay your debt at a slower rate can lead to you paying more overall as you’ll be paying interest for longer. On the other hand, though, if the interest rate on your debt consolidation loan is lower than the rates on your original debts, your debt would grow more slowly.