Are loans the solution to debt management?

Can taking out a low interest loan to pay off a higher interest loan be a suitable debt management solution? In some cases it can be, but you have to be aware of the risks involved and the factors which could land you in trouble.

Recent reports show the British are over a trillion pounds in debt (01/2007). So how do we manage that debt? Families are increasingly choosing debt consolidation as their favoured debt management solution using secure and unsecure loans. This often makes managing the debt easier, and perhaps cheaper, but the added risks are significant.

What is a secured loan?

A secured loan means you borrow a sum of money against something of value, usually your home.

What are the benefits of a secured loan?

Because you have put something of value up as security, secured loans are often a cheaper solution to debt management. However, those with poor credit ratings will end up paying more interest on the loan.

What is the risk?

There is a risk that if you do not keep up your loan repayments, due to illness or losing your job, you could lose your home. The risk you take is dependent on your health, job security and the length of time the loan is to be repayed over. This can range from anywhere between 3 to 25 years.

What is an unsecured loan?

It can be confusing looking at each different debt solution to work out the best one for you. An unsecured loan means you do not put up collateral against your loan. This means that unsecured loans are more expensive, and you can't usually take out as much money as you can with a secured loan. This is because there is more risk involved for the lender.

What is the risk?

Although you don't put your home up for collateral if you don't keep up your payments with an unsecured loan, the lender can take action in the courts to get the money back. Although unsecured loans are not tied to anything if you default on your repayments you could end up being credit blacklisted. This means you wouldn't be able to take out new credit cards, a mortgage or even take advantage of an interest-free deal in a shop. You should think carefully before taking out any kind of loan as part of a debt management solution.

Are loan a solution for debt management?

Loans can help if you are in need of a large amount of money immediately. But before you take on any kind of loan, you should ensure you can afford the repayments. It is helpful to draw up a budget taking into account your income and spending and how that might change over the period you have to repay the loan.

You need to do your research and shop around to find the cheapest rate for you.

Some useful guidelines to follow are:

• Shorter loans mean less interest
• Only apply for one at a time
• Check the small print for penalties
• Consider loan insurance in case you fall ill

Talk to the experts

Taking out a loan isn't always the best way forward in finding the best debt management solution. We recommend talking to an independent financial adviser first.

To find the most suitable debt management solution for your situation visit MRA Debt Help at www.mradebthelp.co.uk, or call 0800 612 92 23.

For independent financial advice, visit our sister company, Mike Robertson Associates, at www.mraltd.com. You can email an independent financial adviser for professional help, or call 0870 803 1995.