Glossary: Consolidation loan
This entails taking out a loan to pay off others, often to secure a lower interest rate – a fixed interest rate or for the convenience of servicing only one loan. The problem is that many unsecured loans – personal loans, overdrafts, credit cards – are then made into one big secured loan and use any property you have as collateral. Fail to pay the loan and the lender can seize your home, so it’s not for those with unstable incomes. Also, don’t be fooled that your new monthly payment is a lot less than you were paying for all your old debts: you’ll be paying off your new loan over a much longer period which, in the long run, could cost you more. Consolidation also won’t address any underlying problems you have with your finances, so reducing or combining your debt repayments may only delay more serious problems, rather than solve them.
As the name suggests, secured loans require security, or “collateral”, usually in the form of property, a motor vehicle, or another valuable item, as a guarantee for the loan. This effectively reduces the level of risk to which a lender is exposed, as the lender has a claim against your home, or other effects, if you default. Secured loans are often available at competitive interest rates. Types of secured loans include mortgages, logbook loans and some types of hire purchase where the loan is secured on the goods you’re buying and these are repossessed if you default.