Secured and Unsecured Debt Consolidation Loans – How Do They Work?
If you want to consolidate debt by getting a loan, you should consider the basic facts, including the differences between secured and unsecured loans. While having a few options for debt consolidation may be a good thing for most people, it can also mean that the process might become overwhelming. If you want to find out where to begin when trying to get rid of some of your bills, you should consider some information on debt consolidation through loans.
How Debt Consolidation Loans Work
When you seek debt consolidation through getting a loan, you seek to turn several bills into one bill. This means you need to add up all the bills you wish to include in the debt consolidation plan, and then take out a loan that is large enough to cover them. Once you get the loan, you use it to pay off all the included bills, and then you simply have a single loan payment every month. This can make bill payment less confusing than ever since you now only have one due date and one set of policies to remember, not one for every creditor.
Aside from eliminating the confusion of several bills, debt consolidation is meant to help with debt relief.
This is because the ideal situation involves you finding a loan with a lower interest rate than most of your current bills. The result is that you can save hundreds, or possibly thousands, of dollars in interest over several years.
The catch is being able to find a big enough loan when you have lots of debt with other creditors already. If you have a lot of lines of credit, lenders may be hesitant to add one more, especially a large one. Even if you have a good credit score, an abundance of debt can keep you from being a good risk for lenders, so it can be hard to get a debt consolidation loan.
Secured vs Unsecured Loans
For this reason, you may need to find a secured loan. This means you put up some collateral, such as your house, to get the loan you need. If you do use your house as collateral, you are taking out a home equity loan. The advantage here is that home equity loans tend to have great interest rates, high limits, and long repayment terms, similar to a mortgage. However, few people these days have much equity in their homes. If this is an issue for you, it may be necessary to use your car or some other expensive item as collateral, in which case the terms of the loan may not be as great.
If you do not have much debt right now but still wish to get a big loan to consolidate it all, you may have a chance at an unsecured loan. This is often desirable since you do not need collateral, meaning lenders cannot take an asset of yours if you do not repay the loan. The downside, though, is that unsecured loans usually have higher interest rates and lower limits than secured loans do. This may not be a problem if your debt is not that large, so you do not need a big loan. In addition, an unsecured loan might be ideal if most of your bills have a high interest rate, in which case the personal loan you take out will still probably be lower than the rest of your debts.
Do Some Research Before Deciding on a Debt Consolidation Loan
If you are not sure if taking out a loan for debt consolidation is the best plan for you, it is wise to research a bit since this path may not be wise for everyone. For example, if you only have a few bills, and the interest rates are reasonable, you may not need this form of debt relief, especially since debt consolidation involves some fees.
On the other hand, if you have several bills that you nearly forget to pay each month, and your interest rates are higher than average, you should at least shop around for a good debt consolidation loan. You will simplify your bills and save money on interest this way. Before you start comparing rates and fees, though, take a look at your credit report. Make sure the score is good and that you are not using all the credit afforded to you as lenders may be hesitant to tack on more lines of credit if you are already maxed out.
If it turns out you do not qualify for an unsecured loan, though, do not despair since you may have access to a secured loan. Though you risk losing your collateral through nonpayment, you can benefit from lower interest rates when you pay on time every month.
There are also Debt Relief Companies that consolidate and settle debts without the necessity of a loan.
Additional Debt Relief Options
These types of programs are an honorable alternative to additional loans or bankruptcy. You should consider a debt settlement program before you file for bankruptcy or before you obtain a debt consolidation loan that is secured against your home. These programs are designed to help people who are experiencing a real financial hardship, delinquent with their creditors or will soon be delinquent due to their inability to pay unsecured debts.
Remember, no reputable Debt Relief Company will charge you an upfront fee and until they settle your debt.
How Debt Consolidation and Settlement Programs Work
As a client in a debt settlement program, you will be making a monthly payment into an FDIC insured “Special Purpose Account”. You will use this account to accumulate the funds that will eventually be used to pay off the creditors. As the money in the account builds, Professional Debt Negotiators will use that money – and their influence and experience – to negotiate and settle each debt one by one. Settlements typically range from 30% to 70% of the outstanding balance. The average settlement is about 50% of the debt at the time of enrollment.Remember, no reputable Debt Relief Company will charge you an upfront fee and until they settle your debt.