Debt Consolidation - Secured or Unsecured Loans?
The commercials on television and radio seem ubiquitous, suggesting that if you owe too much money, all you need to do is use debt consolidation to end your debt problems. Getting out of financial trouble is more involved than just taking out a loan, as you actually have to repay your debt to get out of trouble. The right debt consolidation loan can make it easier to repay bills, as you will have to make only one monthly payment, but the wrong loan can cost you more money.
Debt consolidation is the term for replacing several expensive, high-interest loans with a new one at an affordable rate. By reducing the rate of interest in addition to the number of loans, the borrower has the chance to repay debt faster than before.
There are two ways to borrow money to consolidate your debt; each has its good and bad points. An unsecured loan can be used to repay debt and a secured loan, which requires collateral, can also be used.
A secured loan is probably the most commonly employed tool to consolidate debt, using collateral that offers somewhat of a guarantee to the financial institution that you will repay. In exchange for offering collateral, you do receive some positives - you can probably borrow more cash than you can could with an unsecured loan, and the rate of interest that you pay will almost certainly be more affordable. The most frequently used forms of security are homes and vehicles; it's easy to come up with a value for them and they can sell easily should you default on your payments.
An unsecured loan needs no collateral; the lender simply lends you the money in exchange for a promise to repay. An unsecured loan can be harder to get than a secured one, particularly if your credit history is poor. An advantage for the consumer would be that there is no inherent risk of losing assets, such as a house, should he fail to repay. Unsecured financing comes with a cost, as the interest rates have a tendency to be quite a bit higher than for collateral-backed loans.
The offer of collateral to the financial institution goes a long way towards obtaining a reasonable rate. Borrowers can get the best deal by acquiring secured loans. For the large majority of consumers, secured financing offers the best financial leverage towards paying off a stack of bills. As the rates are steeper, trying to consolidate debt with more unsecured debt may leave the borrower simply treading water. If you are in doubt as to what might work best for you, consult with a lender.
