Using a Loan to Consolidate Credit Card Debt

By Michael Strauss

Over the last decade or so, the availability of credit cards has mushroomed, and nowadays most adults carry at least one card. While this has been great for convenience, in any cases it has led to dangerous levels of debt being built up, and some people find they're really struggling to meet their repayments. A popular option in such a situation is to take out a loan to pay off their existing debts, a process known as debt consolidation.

The basic idea is to get a loan at a lower rate than your credit cards' rates, leading to not only reduced monthly payments but a faster track to clearing the debt. Is this something you should consider?

Unsecured Loans

If you're looking to use an unsecured loan to pay off your credit cards, the decision is pretty simple: can you get a loan large enough to clear your card debts, at a rate low enough to reduce your monthly repayments to a manageable level? If the answer is yes, then it's hard to see any reason not to do so - you're simply converting your existing unsecured debt into a cheaper to service yet still unsecured debt. Just be certain to cancel your cleared card accounts so as not to risk running up new debts.

Secured Loans

If you're considering consolidating your debts through a secured loan, the picture is a little more complicated. By switching unsecured debt to secured debt, you're putting your home at risk of repossession should you fail to keep to your repayment schedule. Is it worth risking your home for a few thousand pounds of credit card debt? Of course, if you're really struggling to make ends meet already, and there's a threat of insolvency on the horizon, then this is perhaps a moot point.

Nonetheless, it's important to realise what you're getting into with a secured loan, so you need to weigh this up carefully before making your decision to consolidate your debt in this way.