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Debt consolidation and equity
Many people with unsecured debts turn to debt consolidation as a way of reducing their monthly costs and/or making their debt more manageable. Basically, there are two kinds of debt consolidation loans: secured and unsecured.
As the name suggests, a secured debt consolidation loan is secured against something valuable - normally property. This means that if the borrower isn't able to keep up with their repayments, they may end up losing the property.
An unsecured loan isn't secured against anything. If the borrower doesn't repay the loan, the lender may decide they need to take legal action to reclaim their money, but they wouldn't be able to force the sale of any property as they would if it was a
secured loan.
You can information on debt consolidations loans at this FAQ page here.
Secured loans and equity
As with any secured loan, a secured debt consolidation loan is actually secured against the equity in a property - the portion of the property's value that the homeowner doesn't owe any money on.
The future of house prices might be uncertain at the moment, but a decade of massive house price rises does mean that many people own properties worth a lot more than they were worth when they bought them.
So a lot of people have equity in their homes, and they may be able to use this equity to consolidate their debts.
An example:
A homeowner with a £60,000 mortgage on a £100,000 house would have £40,000 of equity. So:
• Although their house is worth £100,000, they already owe £60,000 to their mortgage provider. So:
• A lender wouldn't be willing to let them secure a £60,000 loan against their house. This would mean the homeowner would owe £120,000 - but the property would be worth just £100,000 (so £20,000 of that loan wouldn't be secured against equity).
(Note that homeowners aren't obliged to take out a secured debt consolidation loan just because they can. Many homeowners choose to take out unsecured debt consolidation loans because they're not willing to secure debts against their property.)
A note about debt consolidation
Finally, please note that a debt consolidation loan - whether or not it's secured - is still a loan, which must be repaid. As with any loan, you shouldn't apply for one unless you're sure you can afford to repay it.
If you're looking for a way to make your debts more manageable but you're not sure your income is big enough - and stable enough - to commit to repaying a debt consolidation loan, you may wish to talk to a professional debt adviser, who can help you explore your options and figure out the best way of tackling your debts.
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