What is debt consolidation?
Debt consolidation is a popular term in the mortgage market and what it involves is taking out one loan to pay off a number of other loans (or debt). This is normally done to access a lower rate of interest, secure a fixed rate of interest, or for the convenience of paying back only one loan rather than a number of loans (consolidated debt).

Debt consolidation most often it involves a secured loan against an asset that serves as collateral, which is most commonly a house (for example a mortgage which is secured against a house.) The collateral allows you to have a loan with a lower interest rate than without it. This is because in the case where the loan repayments cannot be made the owner of the asset agrees to allow the forced sale (or foreclosure) of the asset in order to pay off the loan. This reduces the risk to the lender so the interest rate offered is lower.

Who can use debt consolidation?
Anyone who has multiple loans could consider debt consolidation to enable a lower interest rate and more convenient circumstances where you can pay back just the one loan, and thus reduce your debt in a quicker and more manageable way.

Why would you use debt consolidation?
The major advantage of debt consolidation is the ability to convert some or all of your current outstanding debts into a lower interest rate loan. This will help to save you money and make it easier to pay back the single consolidated loan.

Consolidating your debt can reduce the financial pressure by allowing you to managing your debt in a simplified manner.

When would you use debt consolidation?
Debt consolidation could be used if you are in the position of servicing many loans at high interest rates, where consolidating them would allow you to benefit from any lower interest rates on offer.

Where can you organise debt consolidation?
Debt consolidation can usually be organised through your existing financial institution, through finance brokers or through specialised debt consolidation organisations.

Financial institutions or financial services that specialise in debt consolidation are easily found by searching on the internet.

Please be aware that you should always seek the advice of a trusted and reputable financial advisor when considering debt consolidation.

Are there any problems with debt consolidation?
As the loan taken out to consolidate debt is normally secured against an asset (for example, your home) there is always the risk that the asset may need to be sold in the case where the loan repayments cannot be made.

Taking out any loan involves fee and charges (legal fees, valuations etc) so it is important to consider these in the overall costing of the debt consolidation process.

You should try to ensure that the consolidated loans keep their original loan terms. By original loan term we are talking about the time it takes to repay the debt you are consolidating. If you wrap all loans into one then you are going to pay them all off over the same period. Mortgages tend to have terms upwards of 20 years, so paying off a car or credit card over this amount of time would mean you would pay more interest than you would have paid with the original loans. An alternative is to get a split loan arrangement that means you take one portion over (for example) 5 years. This would include things like cars, hire purchase and credit card bills for large purchases. The remainder of the loan that represents the house would be over a longer term (eg 20 years or 30 years).