Debt Consolidation Loan (Unsecured)

This is where the borrower takes out a new loan to pay off all of the existing loans. This loan is at a lower interest rate than credit cards, for example, and is paid off over a long period of time, hence the monthly payments are lower. Since this type of loan is not secured against a property the borrower does not need to be a home owner.

How it Works

Lenders make profit by lending money over a period of time and charging interest to the borrower for doing so. The larger the amount of money, and the longer the period of time, the more profit the lenders make. Hence a large consolidation loan (say £15,000), paid off over a number of years (say five or ten) is an attractive proposition to a lender as they will be able to earn a significant amount of interest.

In return for this commitment, they can offer a lower interest rate (e.g. 8.9%) than for example a credit card (e.g. 17.9%). This lower interest rate, combined with a longer repayment period means that the monthly payments of one consolidation loan can be significantly lower than the combined monthly payments on a number of smaller credit card debts and loans.

When it is Suitable

An unsecured loan can make sense for someone who has multiple high interest debts which are causing them to pay significant amounts in monthly payments. If they can afford to consolidate, and if the lenders are satisfied that they will reliably make the monthly payments, then this is often a suitable approach to resolving a debt problem.

Compare Financial Solutions work with a number of recommended companies who arrange competitive consolidation loans all recommended companies hold a Consumer Credit License and are authorised by the Financial Services Authority (FSA)