Debt Consolidation - Secured or Unsecured Loans?

Debt consolidation is the process of replacing several expensive, high-interest debts with a single loan at an affordable rate. By reducing the interest rate in addition to the number of financial obligations, the borrower has the chance to repay debt more quickly than before.

The advertisements on television seem ubiquitous, suggesting that if you have too much debt, you just need debt consolidation to end your financial troubles. Getting out of heavy debt is more complicated than just borrowing money, as you must pay back your debt to get out of trouble. The right debt consolidation loan can simplify your life, as you will have only one monthly payment, but the wrong loan can cost you more money.

There are two ways to borrow to consolidate your debt; each has benefits and drawbacks. An unsecured loan can be used to repay financial obligations and a secured loan, which requires collateral, can be used as well.

A secured loan is almost certainly the most commonly employed financial tool to consolidate debt, using collateral that provides a bit of a guarantee to the lender that you will repay the loan. In exchange for providing collateral, you do receive a few advantages - you can probably borrow more money than you could with unsecured financing, and the rate that you pay will almost certainly be more affordable. The most frequently used forms of collateral are homes and vehicles; it is easy to establish a value for them and they are easy to sell should you default on your payments.

An unsecured loan needs no collateral; the financial institution simply lends you the money in exchange for a promise to pay it back. An advantage for the borrower would be that there is no added risk of forfeiting property, such as a house, should he or she fail to repay. An unsecured loan can be more difficult to get than a secured one, particularly if your credit history is poor. Unsecured borrowing comes with a cost, as the interest rates are likely to be substantially higher than for collateral-backed lending.

Consumers can get the best deal by applying for secured loans. The offer of security to the bank or a credit union goes a long way towards obtaining a reasonable interest rate. For the vast majority of borrowers, secured financing provides the best leverage towards paying off a mountain of debts. As the interest rates are more expensive, trying to consolidate such bills with more unsecured loans may leave the borrower just going nowhere. If you are uncertain as to what might work best for you, consult with a bank or a credit union.

©Copyright 2007 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing , a firm devoted to affiliate marketing, and DebtMender.net, a site about debt consolidation and credit counseling, personal bankruptcy and other financial matters.This article is free for republishing
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