Save, make, understand money

Credit Cards & Loans

Why you shouldn’t view debt consolidation as a last resort

Paloma Kubiak
Written By:
Paloma Kubiak

Households seem to be more reliant on credit to steer them through the cost-of-living crisis. If you’re a homeowner with several credit commitments, debt consolidation via a secured loan could help.

Borrowing is on the rise and at a fierce pace too, according to the Bank of England’s latest Money and Credit statistics. It revealed Brits borrowed an additional £1.8bn in June on net, double the £900m recorded in the previous month.

As more people appear to be relying on credit as the cost of living crisis intensifies, borrowers may find they’re repaying several credit cards, store cards, personal loans, and overdrafts in one go.

It can be challenging managing multiple credit commitments at once, not to mention expensive to service high monthly interest rates on some borrowing.

But, if you’re a homeowner with good equity and a good credit score, you could consider a second charge mortgage – also known as a homeowner loan – which is finance secured against your property.

Homeowner loan for debt consolidation

Homeowner loans are often taken out to help reorganise personal finances, allowing borrowers to consolidate existing debt into easy-to-manage monthly payments.

While debt consolidation can be viewed as a negative in managing outstanding balances – and often as a last resort – in the right circumstances, it can be a sound financial decision.

If your total credit balance is less than £20,000, it may be worth considering an unsecured debt consolidation loan or a credit card offering 0% on balance transfers rather than a secured loan as these won’t risk your property in the case you can’t meet your repayments.

However, if you do have debt balances above £20,000, the chances are that a secured loan may be a suitable option for you. You can also borrow a lot more money than you can via a personal loan or credit card.

As well as offering customers one fixed payment each month over an agreed period, a consolidation loan could reduce the amount of interest you pay each month by bringing all your existing debt on to a lower interest rate. It will also make it easier to keep track of outstanding balances in one place.

Another welcome feature is that your credit score may rise. An initial consolidation loan application may dent your credit rating, but, over time, the reduction in your credit card balances may positively impact your credit score as being close to credit limits could be viewed as ‘over-indebted’ by some lenders.

However, it’s important to remember that you could extend the overall payment term which could result in more interest paid in total over the period.

And, as the consolidation loan is secured to your home, it may be repossessed if you do not keep up with repayments on a mortgage or any other debt secured to it.

Pepper Money homeowner loan

The average secured loan rate is 6.1% from Pepper Money, while the rates for unsecured loans will vary depending on the amount you borrow. Those borrowing under £3,000 can see rates from 5.9%, while loans above £5,000 become cheaper, from 3.7%.

But, for larger loans, in the region of £25,000 to £35,000, the top rate is 5.9% rep APR taken out for between four and five years, according to MoneySavingExpert data.

At Pepper Money, you can borrow up to 100% of your property’s value – that is the equity after your existing mortgage balance is taken into consideration – particularly advantageous given the soaring house prices.

The minimum property value considered is £75,000 and homeowners can borrow between £5,000 and £1m. The repayment term offered is between three and 30 years, subject to individual circumstances and credit checks.

With a Pepper Money secured debt consolidation loan, we’ll take care of clearing your existing loan, credit card and store card balances when you complete, so you don’t have to organise this yourself.

And don’t forget, you can make overpayments without being penalised if you wish to clear your balance quicker.

The first step is to get a clear picture of your existing borrowing and financial commitments. Check your current credit card, loan and overdraft balances, interest rates and monthly repayments. You can then calculate the total value of the consolidation loan you’ll need to cover these existing debts on your application.

But, before going ahead with debt consolidation, it’s important to consider the total interest paid as this may be more than your existing arrangement. See Pepper Money’s homeowner loan calculator to find out what your repayments might like look each month, and how much you could end up paying if you apply.

To apply for a homeowner loan with Pepper Money, visit our homeowner loan page or call us on 0808 239 1496. Our fully qualified mortgage advisers will ascertain whether a consolidation loan is the most suitable choice for you, and they can walk you through the application process.

Our homeowner loans are also available through selected brokers.

The average initial rate highlighted is the median initial rate offered in quotes across near prime, prime and high LTV products for customers originated via a broker and direct since our latest pricing change on 22 July and until 10 August.