Unsecured Debt Consolidation

A lender with no security has one recovery path and it is slow. A lender with a registered mortgage has a fast one. The rate difference is that risk, expressed as a number, and no amount of shopping around removes it entirely.

It also explains the other differences you will notice. Unsecured limits are smaller. Terms are shorter, because the lender wants the exposure to end. Assessment leans harder on income stability and credit history, because there is nothing else to lean on. And approval turns on your conduct more than on your assets.

Unsecured balances can be consolidated in two ways: with a new unsecured loan, or by absorbing them into borrowing secured against property. Both are legitimate. They suit different situations and they fail in different ways.

There is a third structure worth naming: doing both. Absorb the largest balances into secured borrowing set up as a shorter split, and clear the small remainder with a deliberate repayment plan rather than another loan. That combination is frequently the cheapest and it rarely gets offered.

State it once, plainly. Moving short-term unsecured debt into a thirty-year mortgage lowers the repayment and lowers the rate. It can increase the total interest you pay across the full term, because the debt is now being carried for decades rather than years.

This is not an argument against secured consolidation. It is an argument against leaving the term on autopilot. The same lower rate, applied over a term that reflects the original debt, is straightforwardly cheaper on both measures.

1. 01Ask for the consolidated amount to sit in its own loan split.
2. 02Set the split term to something close to the original debt's natural life, commonly three to seven years.
3. 03If a split is unavailable, automate an additional repayment equal to the difference between the two repayment figures.
4. 04Do not extend the split back out at the next refinance without a deliberate reason.

Serviceability is the lender's test of whether you can afford the loan, and it is more conservative than a household budget. Understanding how it works explains most declines.

• Income is verified, and unstable or recently commenced income is treated cautiously
• Overtime, bonus and commission income is often shaded rather than counted in full
• Living expenses are compared against a benchmark and against your actual statements, and the higher figure usually applies
• Existing credit limits are assessed as if fully drawn, at a stressed repayment
• The new loan is assessed at a rate above the actual rate, to test for movement
• Dependants, existing commitments and any support obligations are counted

Serviceability buffer

The margin a lender adds to the actual rate before testing whether you can afford the loan. It is why an approval figure lands below what a household budget suggests.

Benchmark living expenses

A minimum expense figure the lender applies, compared against what your statements actually show. The higher of the two usually wins.

Shading

Discounting variable income such as overtime, bonus or commission, so only part of it counts towards capacity.

Limits assessed as drawn

Existing credit limits treated as if fully used, at a stressed repayment, whether or not you have touched them.

Loan-to-value ratio

The loan measured against the value of the security. Lower gearing is the main lever available to a borrower with equity.

Payout figure

The amount required to close each debt on the settlement date. It is what the new loan actually has to cover, and it moves until the day it is used.

The practical consequence is that closing unused limits before applying can help more than a small pay rise. It is also why consolidating and then leaving the old accounts open produces the worst of both worlds: a new loan on the file, and the old limits still counted against you.

Unsecured applications can move within days when documents are complete. Secured structures follow property timeframes. In both cases the delay is almost always a missing document rather than a slow assessor.

1. 01

   Build the true total

   Every unsecured balance, limit, rate and repayment, including the ones that are easy to forget. The real number is usually larger than the remembered one.

2. 02

   Test both structures

   Unsecured loan against secured consolidation, shown monthly and over the full term, using your figures.

3. 03

   Clean the file before applying

   Close what can be closed, correct anything wrong on your credit file, and where possible put a few clean months behind you.

4. 04

   One application, to the right lender

   We choose from the panel based on your actual file, not the advertised rate. Repeated enquiries make the next application harder.

5. 05

   Payouts and settlement

   Payout figures obtained for each debt so accounts close at zero rather than leaving a residue that accrues a fee.

6. 06

   Lock in the discipline

   Direct debit set the day after pay, extra repayment on any split, accounts confirmed closed in writing.

Consolidation solves a structure problem. It does not solve an income problem, and it does not solve a solvency problem. We would rather tell you that at the start.

• The total is beyond what any realistic income could service over any term
• The pattern is still deteriorating, with balances rising month on month
• Repayments are being funded by new borrowing
• The household's fixed costs already exceed its income before any debt repayment
• Putting the family home behind unsecured debt would create a risk you should not carry

We tell you the true state of things early, and we do what we say we will do.