Property Futures

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Types of Loans: Consolidated Loans

Article: what consolidating your loans involves and its advantages and disadvantages.

Rather than holding several debts with different lenders, it is possible to consolidate them into one loan. This is done by taking out a larger loan and using it to pay off the other debts.

consolidated loans

Consolidated loans

The goal with consolidating a number of debts is to reduce interest rates and loan repayments, making the debt more manageable and cheaper.

Consolidation is usually done by moving unsecured debt, such as credit card debt, to secured loans, such as mortgages, as secured loans have lower interest rates.

  • However, this naturally has risks as if the borrower cannot keep up repayments, the asset the debt is secured against may be at risk.

While there are many companies that offer to consolidate loans, they often charge high fees and focus on the consumer debt market rather than working with investors. Consolidating debt requires no special expertise – it’s simply the practice of reducing the number of debts a borrower has by increasing the value of one particular debt.

Why would a real-estate investor consolidate loans?

 

Real-estate investors will often have several properties in their portfolio, each with separate needs and outstanding mortgages. Common reasons to consolidate include:

  • To reduce costs: consolidating loans may result in lower interest rates and loan fees
  • To reduce risk: small mortgages on several properties can be consolidated into one or two larger mortgages, reducing the number of properties at risk of foreclosure in tough times
  • To unlock more capital:
consolidating loans can be a preparatory step to unlocking capital, for example remortgaging a property

Advantages of consolidating loans

 

  • Reduce loan repayments
  • May reduce fees
  • May reduce interest rates
  • Easier to manage

Disadvantages of consolidating loans

 

  • Fees for early loan repayment are common
  • Consolidation companies often charge and fees may wipe out savings made by consolidating
  • Switching from an unsecured loan to a secured loan may put the asset the loan is secured against at risk
  • Total repaid may be higher
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