Can homeowner loans help you out of debt?
Wednesday, 28 May 2008 09:00
According to the Bank of England, British consumers have notched up a staggering £1.3 trillion in unsecured borrowing. As lenders are tightening their credit crunch belts, it may come as no surprise that increasing numbers of borrowers find their debts spiralling out of control. Against this background, can homeowner loans help people out of their debt difficulties?
The principle of a homeowner loan is really quite straightforward. As the title suggests, it is a secured loan made to a homeowner, who offers their home as security against borrowing. If the home is already subject to a mortgage, the lender takes a “second charge” on the home and is entitled to recover the loan from proceeds of the sale of the property if the borrower defaults on repayments. This relieves the lender of a considerable degree of risk in advancing the loan and, as a result, therefore requires a lower rate of interest than if there were no security offered.
It is a small step from here to see how useful a homeowner loan could be in the management of your debts or simply to ensure that you end up paying less in interest. If all of your various unsecured loans are attracting a relatively high rate of interest, then it is possible to use a homeowner loan to pay off the unsecured debt and repay just the one secured loan at a lower overall rate of interest. This process is called debt consolidation.
In addition to reducing your monthly repayments, it has two further advantages. The first is a question of convenience; instead of having to remember to make a number of different repayments, on your unsecured loans and credit cards you need to pay just the one repayment each month on a homeowner loan.
For those who need to bring down their monthly repayments on outstanding debts still further, it is also possible to use a homeowner loan to extend the repayment period. Although this will of course increase the amount of interest paid over the whole life of the loan, if you are having difficulties managing your present debts, it offers a way of immediately reducing the monthly repayments.
It is important to remember that a homeowner is a secured loan and the security offered is your house. Therefore, it must be remembered that if you default on your payments, your home is at the risk of repossession.