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Associate Article

A guide to consolidating your debts

The financial history of any consumer dictates something known as a credit score. A credit score is used by lenders to decide whether a consumer is a ‘high-risk’ or a ‘low risk’ borrower. This, in turn, affects the borrower’s potential to receive good or bad rates of interest on things such as loans, mortgages and credit cards. The poorer a credit rating, the higher the rate of interest the consumer will be charged. The better a credit rating, the lower those rates of interest will be.

A credit rating is a reflection of a consumer’s ability to make payments on almost any financial commitment – from bill payments to mortgage fees. The deeper in debt, the less likely to be able to meet the repayments a consumer becomes, the worse their credit score is likely to be and the less likely they are to be able to escape the spiral of debt.

A credit rating can be reversed with careful money-management, so that outstanding debts are honoured. The score is then affected positively and the consumer becomes less of a risk to lenders, meaning that their potential for lower-interest borrowing rates is increased.

Many homeowners use the equity in their houses to consolidate and pay off their debts, thus reversing their credit ratings and, hopefully, making like easier in the future. They do this using either secured loans or unsecured loans.

A secured loan is directly related to a consumer’s home. The lender ‘secures’ the loan against the borrower’s house meaning that, in the event of inability of the borrower to meet repayments, the house can be forcibly sold and the lender can reclaim the loan from the price that the house is sold for.

This type of loan is cheaper to manage than its counterpart, as the loan is secured. There is also the potential to borrow larger sums when using your house as collateral and also the potential for the consumer to borrow the money over a considerable length of time e.g. 20 years. Thus, the interest rates attached to this form of loan are comparatively low. However, the risk of repossession is not one to be taken lightly.

Unsecured loans work in the opposite way. Because the lender cannot secure the loan against a borrower’s home, the risk factor for them is increased. To reflect this risk, the rates of interest offered are often much higher, the amounts to borrow can be much smaller and the length of time that the money can be borrowed for can be a lot less. There is also a minimal risk that the house can be repossessed in extreme circumstances, although, statistically, this is a rarity. If you’re planning on taking out a loan it’s prudent to first have a look at loans calculator such as the one on the RBS loans website, most major loan providers will have something similar. They should help you to work out how much you can realistically afford to borrow and what sort of repayment arrangement would best suit your situation.

Before embarking on either of these paths it is worth contacting a Debt Counselling Service. These services are free and offer specialist advice on how to manage finances in times of difficulty and try to manage the situation so that someone in debt and/or with a poor credit history can try and consolidate their debts without risking their home.

If you’re struggling with an escalating credit card debt its worth scouting round for a better deal that might at least save you some money in the short term, look out for good balance transfer rates - there are currently plenty of 0% on balance transfer cards on the market – the Natwest credit card offers a particularly good deal with 0% on balance transfers for 13 months, a 2% balance transfer fee and 0% on purchases for 3 months. For an up to date overview of the best offers it’s a good idea to check out one of the many credit card comparison sites like www.moneysupermarket.com or the Motley Fool credit cards section.





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