You’ve heard that debt consolidation is a common way to pay off a bunch of debt with a single loan. You’re willing to give it a shot. But is it smarter to get an unsecured debt consolidation loan, as opposed to a secured one?
Secured Vs. Unsecured Loans
A secured loan requires you to “put up” assets such as your house or vehicle to secure loan repayment. To wit, if you get a mortgage and miss payments, the mortgage holder can foreclose on your property to satisfy the loan.
On the other hand, unsecured loans such as credit cards are based exclusively on your pledge to repay and are not secured by any property. Because these loans are riskier for the lender, they usually have a higher interest rate.
Debt Consolidation And Secured Loans
You have a broad range of choices when it comes to secured loans. For example, you can get a home equity line of credit, take out a second mortgage, or refinance your house. You can get a car loan and use your vehicle as collateral. With a 401K loan, your retirement fund is collateral. Any of these could potentially be used for debt consolidation. But is that the right move for you?
Benefits Of Consolidating With A Secured Loan
Because secured loans often have lower interest rates than unsecured loans, they might save you money and make the monthly payment lower. The interest payments can sometimes even be tax deductible. And in general, secured loans are easier to get because they’re less risky for the lender.
Disadvantages Of Consolidation With A Secured Loan
The ginormous negative attached to secured loans is the likelihood that, if you miss payments, you will lose the property you listed as collateral. If you can’t repay the loan, you’ll lose whatever you pledged to secure the loan, be it your house, life insurance, car, retirement fund, or whatever.
Also, the term of a secured loan could be longer than the term of the liabilities you consolidated. As a result, the total interest that you dole out over the loan’s life could exceed what the interest would’ve been on the individual debts, although the monthly payment is lower.
Pros Of Using Unsecured Loans For Debt Consolidation
The chief advantage of an unsecured debt consolidation loan – Freedom Debt Relief, is that it doesn’t put you at risk of losing your property. And even though the interest rate may be more than what you’d get with a secured loan, it could be less than the aggregate rate you’re paying on current debts. If you can qualify for a low-interest personal loan and lower your rate, you’ll save money on loan repayment.
You could also boost your credit. Consolidating your debt with an unsecured personal loan could bump up your credit score if it results in a lower credit utilization rate and more timely payments. Credit utilization assesses the amount of available credit you use and accounts for a third of your credit score.
Cons Of Consolidating With An Unsecured Loan
In general, such a loan will require good credit. Also, interest rates are relatively higher. If you’re doing a balance transfer to a no- or low-interest card option, a transfer fee could offset any savings. Also, the promotional period for no or low interest is generally limited.
So, why is it smarter to get an unsecured debt consolidation loan? There are several advantages to doing so, as we’ve outlined. But the biggest reason by far is that such a loan puts none of your assets at risk.