Does Debt Consolidation Worsen Personal Debt?

Secured loans and Unsecured Loans to Consolidate Credit Card Debt

Apr 6, 2009 Asa Ghaffar

Secured loans and unsecured loans are regularly used for debt consolidation. Does consolidating high APR personal overdrafts and credit card debt worsen personal debt?

Consumers with a bad credit rating regularly take out a secured loan in order to perform debt consolidation. Those with good credit can opt for an unsecured loan provided their cumulative personal debt is under £15,000. Multiple sources of high APR credit card debt, personal loans and overdrafts can greatly complicate finances, resulting in higher monthly repayments to creditors and an increased likelihood of late payment charges. Debt consolidation loans help consumers to put all personal debt under one roof and make a single monthly repayment.

Debt Consolidation and Secured Loans

Whilst credit card debt, personal overdrafts and unsecured loans charge a high APR, they are all forms of unsecured debt. In the event of default, creditors have limited powers of collection and debtors have more options available to remedy the situation. Debt consolidation, particularly for those with a bad credit rating, involves turning unsecured debt into a secured loan on the family home. Whilst debt consolidation unarguably lowers household bills, it gives lenders collateral and greater powers. A secured loan means that a lender can repossess property to recover their money.

Debt Consolidation vs. Debt Solutions

Debt consolidation is a good idea for individuals with good credit and access to low APR unsecured loans. A bad credit rating may mean that the only way to perform debt consolidation is via a secured loan. A debt solution may result in a bad credit rating, but can make household bills more manageable. Debt solutions are available that can reduce monthly repayments. Those with serious debts over £15,000 could pursue a debt solution, such as an Individual Voluntary Arrangement (IVA) or personal bankruptcy. Less serious personal debts can be tackled with a debt management plan or Debt Relief Order (DRO).

Is a Credit Card Balance Transfer Better Than Debt Consolidation?

According to CreditAction.org, credit card debt in February 2009 was £53 billion and the average rate of interest was 17.92 per cent. Many consumers performing debt consolidation opt for a secured loan rather than a 0 per cent credit card balance transfer. Virgin credit card, for example, offers new customers a 0 per cent rate on transfers for a period of 15 months. It is then possible for those with a good credit rating to perform a further transfer at the end of the term. Consumers are able to reduce monthly repayments due to the absence of interest on credit card debt and avoid offering collateral to lenders.

Debt Consolidation and Existing Credit Agreements

Individuals performing debt consolidation regularly leave existing credit agreements open. This can actually serve to increase levels of personal debt as there is a huge temptation is to use the same credit card and personal overdrafts. If debt consolidation is opted for, close down existing credit agreements or further debt consolidation is the likely outcome.

Whilst debt consolidation can help to make monthly repayments and household bills more manageable, it isn't always the right option. Think carefully prior to taking out a secured loan to consolidate debt as a debt solution may be more appropriate. Consumers with a good credit rating may be well served by performing debt consolidation with an unsecured loan as no collateral is provided.

Individuals that have signed-up to credit agreements prior to April 2007 should check to see whether an illegal credit card or unenforceable loan agreement is in place. This could lead to the debt being written-off and any adverse credit entries being removed.

The copyright of the article Does Debt Consolidation Worsen Personal Debt? in Personal Budgeting/Finance is owned by Asa Ghaffar. Permission to republish Does Debt Consolidation Worsen Personal Debt? in print or online must be granted by the author in writing.