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Debt consolidation - Secured loan or unsecured?
Debt consolidation, as we have mentioned extensively, is the process of replacing a number of expensive, high-interest loans with a single loan at a reasonable interest rate. By reducing the interest rate and the number of loans, the borrower has the opportunity to repay his or her debt faster than ever before. The sooner you get out of debt, the better off you will be.
Read on.
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A secured loan or an unsecured loan - which is best?
The advertisements on television and radio seem ubiquitous, suggesting that if you have too much debt, all you need to do is use debt consolidation to end your financial troubles. The problem is more complicated than that, of course, as you actually have to repay your debts to get out of trouble. Under the right circumstances, a debt consolidation loan can make it easier to repay bills, as you will have to make only one payment each month. Ideally, a consolidation loan will also have a lower interest rate than the debts that it replaces.
There are two ways to borrow money to consolidate your debt. An unsecured loan can be used to repay debt and a secured loan, which requires collateral, can be used as well. There are good and bad points to each one.
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- A secured loan is probably the most commonly employed financial tool used to combine bills. Such financing will require that you provide collateral, which provides a bit of a guarantee to the lender that you will repay. The most frequently used forms of collateral are homes and vehicles; it’s easy to determine a value for them and they are easy to sell should you default on your payments. In exchange for providing collateral, you do receive some advantages - you can probably borrow more money than you can with an unsecured loan, and the interest rate that you pay will almost certainly be more affordable.
- An unsecured loan requires no collateral; the lender simply lends you the money in exchange for a promise to repay. Credit card advances are a good example of unsecured lending. Such financing comes with a price, however, as the interest rates tend to be substantially higher than for secured lending. Credit card advances may carry a 20% interest rate, while a second mortgage might have a rate that is no more than half of that. An advantage for the borrower would be that there is no inherent risk of losing property, such as a house, should he or she default on the loan. An unsecured loan can be harder to obtain than a secured one, particularly if your credit is poor.
As a rule, borrowers can get the best deal by applying for secured financing. The offer of collateral to the lender goes a long way towards obtaining a favorable interest rate. For the typical debtor, the bills he or she is trying to eradicate are unsecured ones that carry high interest rates already. Trying to consolidate such bills with more unsecured debt might leave the borrower simply treading water. For the vast majority of borrowers, secured financing provides the best financial leverage towards paying off a stack of financial obligations.
Your own situation may vary, however, so it is always in your best interest to discuss your needs with a financial professional. You might start by discussing your needs with your local bank or credit union.
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