Rate rises begin to bite0

As rising interest rates begin to bite, you may find that keeping up with numerous monthly payments for loans and credit cards at assorted interest rates, becomes increasingly confusing. Added to that, every so often less frequent bills, such as household insurance and car premium renewal, rear their heads, and suddenly the amount going out each month is no longer covered by your monthly income.

This is when debt consolidation can help. By combining all your loans and other debt, such as credit cards, into one, you have a single payment to make on just one day of the month and you know exactly where you stand.

But there are some important things to look out for. And you need to do the maths, to make sure you would be better off by consolidating your debt, because there are a number of pitfalls.

The difference between unsecured and secured loans

First of all, you need to know the difference between unsecured and secured debt. If you already have a loan it is probably unsecured. The lender trusts you to pay it off in full and on time. And he will make checks that you can do this by looking at your credit record.

The other type of loan is a secured loan, which, as the name implies, is secured against something of value that you own - in this case usually your home.

Making checks

While the lender will make the usual checks, he doesn't have to exercise so much trust. He knows he will get his money back if you default, because the loan is secured against your property. If you fail to pay him back in full, he will simply repossess your home and sell it to realise his cash. Therefore you need to be aware that if you take out a secured loan your home is at risk if ever you can't make the repayments.

Other things to note are that, whereas unsecured loans are usually at a fixed rate of interest - so you know what you'll pay each month - secured loans may float with rising and falling interest rates in the general economy. This means that if rates continue to go up and you have a secured loan with a floating rate, you could find yourself unable to make your monthly repayments.

17 July 2007 © Moneyextra.com

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