How To Consolidate Debt

Dealing with mounting debt can become an incredible source of stress. It can affect your mental health, interactions with friends and family, how you go about your daily activities, whilst making saving for retirement much more difficult.

From endless sleepless nights and constant irritability to having trouble focusing, uncontrollable debt most definitely takes a toll. Fortunately, there are solutions, and they come in the form of secured debt consolidation loans.

As of January 2025, the average household debt (excluding mortgages) in the UK was approximately £17,000, representing an astonishing 82% increase over the preceding 10 years.

For many individuals and families, managing debt has become a daily concern.

Any uncontrollable credit card debt must be considered bad debt that needs to be addressed, and that’s exactly what secured debt consolidation loans do

So, what are the types of debt consolidation loans you should consider, and how does a secured loan help you leverage home equity to eliminate bad debt?

Understanding debt consolidation loans

Easy credit can be alluring. For credit card companies and high-interest-rate loans, the payoff is the higher interest rates on outstanding balances.

Credit cards lead to impulse buying. Maxing out a credit card is often followed by maxing out another and another until individuals have no choice but to make minimum monthly payments on multiple credit cards.

For individuals managing crippling debt, making minimum monthly payments becomes habitual. This reduces their cash on hand, making daily finances extremely difficult.

However, secured debt consolidation loans can address this issue.

With secured debt consolidation loans, all your bad debt is combined into a single, larger loan. With this type of secured loan, your outstanding credit card balances are paid in full, and your credit cards are cancelled.

You end up making a single, smaller monthly payment to your consolidated loan at a lower interest rate.

What constitutes a secured loan vs an unsecured debt consolidation loan, and what types of debt consolidation loans are available in the UK?

Types of debt consolidation loans

Within the UK, both secured loans and unsecured loans are used for debt consolidation.

With a secured loan, you use an asset as collateral against the loan. For most people, that asset is their home, but it can also be any property or high-value asset that a UK lender accepts as collateral.

For UK banks, a secured loan has lower risk than an unsecured loan. Should you be unable to make payments on your secured loan, your home would be sold, allowing the bank or lender to recoup the remaining amount owed.

This is why secured loans have lower interest rates, better payment terms, and higher borrowing amounts than unsecured loans.

With unsecured loans, there is no collateral to back up the loan, and the bank or lending institution must take on more risk. This means higher interest rates and less-favourable payment terms.

Unsecured debt consolidation loans

In an ideal world, every person needing debt consolidation has home equity. However, this simply isn’t the case. For those individuals who do not own a home or other property, unsecured debt consolidation loans are often their best alternative.

Unfortunately, because the loan is not secured, not backed by any collateral or asset, the terms of the loan aren’t as good as a secured loan. Despite this, you should still be able to make lower monthly payments courtesy of lower interest rates than the interest rates you’re being charged on outstanding credit card debt.

When pursuing an unsecured debt consolidation loan, always conduct an online comparison as a minumum. Your goal should be to get the lowest possible interest rate and the best payment terms. If you are concerned about cash flow, then find a balance between a lower interest rate and longer payment terms.

Second charge mortgages

One of the more popular secured debt consolidation loans includes second charge mortgages. These loans are provided by lenders other than the bank or financial institution that provided you with your first charge mortgage. Often referred to as a homeowner loan, second charge mortgages allow you to use home equity to reduce your debt.

With second charge mortgages, your home is the collateral for the secured loan. The bank or lending institution determines the amount of home equity by deducting your home’s value from your mortgage.

With second charge mortgages, lenders will require an appraisal of your home’s value. In some cases, lenders will cover this charge. However, in most cases, you, as the borrower, would have to cover the cost.

Once your home’s value is determined, the amount of home equity is determined, and you are then allowed to borrow a percentage of the home equity.

The percentage and amount you can borrow depend entirely upon the bank or lending institution providing the second charge mortgage.

It’s important to note that with second charge mortgages, you are essentially paying two mortgages. You must continue to pay your first charge mortgage and make second charge mortgage payments simultaneously. In addition, should you be unable to keep your mortgage payments and your home is sold as a result, your first charge mortgage lender would be paid in full before the second charge mortgage lender.

For this reason, second charge mortgages don’t have as competitive an interest rate and borrowing terms as a remortgage, which is the next secured loan below.

Remortgage

The ideal secured debt consolidation loan for homeowners is a remortgage. With a remortgage, you stick with your first charge mortgage lender. They “pay off” your old mortgage and replace it with a new, higher mortgage. However, this all depends upon your home equity.

Remortgages are excellent secured debt consolidation loans if you have sufficient equity built up in your home. If you do have home equity, then remortgages typically allow you to borrow a higher percentage of that equity than second charge mortgages.

In addition, the interest rates, payment terms, and length of loan should always be better than a second charge mortgage.

Special considerations with secured debt consolidation loans

Whether you’re using a second charge mortgage or a remortgage, the lender will most likely do a stress test to ensure you can afford the new, higher mortgage payments. This stress test measures your debt-to-income ratio.

Another important consideration is that individuals who use debt consolidation loans must ensure they do not access new credit cards. The goal is to reduce your bad debt. While your outstanding balances on credit cards will be cleared and those cards closed, it’s very common for individuals to fall back into the same mistake and decide to apply for other credit cards afterwards.

Finally, while it may be tempting, do not borrow the maximum percentage on your home equity unless necessary. Borrow only what is needed to eliminate your credit card and high-interest loans. This maintains your home equity while helping you lower your new monthly mortgage payment.

Helping you make sound financial decisions

As a well-established finance brokerage firm with a rich and storied history serving UK customers, we’re the go-to solution for people wanting to push reset on their finances.

From homeowner loans, bridging loans, asset financing, personal financing, investing, and retirement planning, our team is incredibly well-versed in all things personal financing-related.

If you are thinking about debt consolidation loans and have questions about secured versus unsecured loans, contact us now.