Wrong Tern Finances

You may have considered debt consolidation as a possible solution to your debt problems. However, you may not know that there are two different types of consolidation to consider.

The one most often discussed is a secured debt consolidation loan. Usually, the loan is secured by your home equity. Often you will either take out a home equity loan or you will refinance your entire mortgage, secure a larger loan, pay off your first mortgage, and receive the difference between that loan and your home’s value in cash.

However, if your home has not built up enough equity, you don’t want to take out a new mortgage, or you don’t own a home, you may still be able to get the second type of consolidation loan: one that is considered unsecured.

Secured vs Unsecured Consolidation Loans

Unsecured consolidation loans are different because they require no collateral. If the loan is not paid in full, you don’t run the risk of losing any property as a result. With a secured loan, the bank can take your home if payment is not made.

Because the unsecured loans are riskier for the lenders, you will end up paying more in interest rates and may have to pay off the loan in shorter time. That might also mean you’ll face higher payments than you would with a secured consolidation loan.

Another difference is in the amount you can borrow. Secured consolidation loans are rarely issued for less than $10,000. Unsecured consolidation loans, on the other hand, are limited at less than that amount.

Reasons to Choose Unsecured Debt Consolidation Loans

If you’re trying to decide between a secured and an unsecured consolidation loan, then here are some factors to think about:

o Do you have collateral? If the answer is no, then your only option is an unsecured consolidation loan. If the answer is yes, then think about whether or not you want to tie your home to this type of loan.

o How much debt do you owe? Add up all of the debts you want to consolidate. If the amount equals more than $10,000, then you’ll probably need to choose a secured consolidation loan. For lower debt amounts, you can choose either type of loan.

o What are the interest rates on your debt? Remember that an unsecured loan is going to involve higher interest rates than a secured one. If those rates are going to be close to what you are paying on the debt you want to consolidate, then you may want to go with a secured consolidation loan instead.

o Do you need lower payments? If the purpose of consolidation is to make your debt payments more manageable, you may not want to choose an unsecured loan. Because the terms of these loans are usually shorter, you may end up paying significant monthly payments. If you just want to eliminate some high interest debt or make managing your debt easier, then either type will work well for your needs.

Before you choose either type of consolidation loan, make sure to shop around and secure the best loan deal available.

By: Paul Sarwana

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