For many people with debts, debt consolidation can be a good way to bring them under control – or stop them getting out of control in the first place.
Quite simply, consolidation involves taking out a new loan or mortgage and using it to pay off multiple smaller debts.
By bringing their various debts together, consolidation makes them much easier to manage: it stands to reason that one payment is simpler than multiple payments to remember (and budget for). It's an important point, given that making a payment late – or even forgetting to make it altogether – can lead to fines and damage the borrower's credit rating.
At the same time, consolidating debts gives the borrower a chance to reassess their budgets and arrange repayment terms which are right for their financial situation as it stands today, rather than the way it was when they took on their other debts in the first place. So it's an opportunity to arrange a longer repayment term if they need to – which will decrease the amount they need to pay per month.
However, there is a downside to longer repayment terms. Repaying any debt more slowly may well end up increasing the overall cost of that debt, as it'll spend longer accruing interest. Having said that, a debt consolidation loan is likely to come with a lower interest rate than other forms of credit, especially credit cards and store cards and other high-interest credit.
So – does it make sense to take out a debt consolidation loan, or a debt consolidation mortgage? There are pros and cons to either approach.
A debt consolidation mortgage, for example, is likely to come with a lower interest rate than a debt consolidation loan – even if that loan is secured against property.
However, any form of remortgage is only available to homeowners. Today, in the 'credit crunch', they're only available to people who have sufficient equity in their property (ie homeowners whose property is worth substantially more than any loan and / or mortgage they have secured against it).
The interest rate on a debt consolidation loan may be higher than that on a remortgage, but it's still likely to be lower than some or all of the debts the borrower is using it to repay. And they may be able to find a loan with a particularly low rate if they own enough equity in their home and they're willing to secure the loan against their property.
Securing any debt against a property can be dangerous, though. If the borrower fails to keep up with repayments to a mortgage or secured loan, there's a chance their lender may try to force them to sell their property so they can repay the money they owe.
The same thing can happen with an unsecured loan (one which is not secured against property), but it would take longer and be more complicated than the lender's point of view, as they would have to apply for a Charging Order to have the debt secured against the property in the first place.
Finally, as with any debt, no-one should ever take out a consolidation loan or mortgage unless they're sure that they can afford the repayments – and that they're not expecting any major changes in the foreseeable future that could change that.