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Secured vs Unsecured Debt Consolidation Loans

Getting a loan to pay off multiple credit cards and other debts is a popular option for many consumers looking for a way to streamline their debt repayment efforts. Consolidating multiple debts into one loan means you’ll only have one payment to think about each month so you won’t have to worry about missing payments, accruing late fees or juggling multiple due dates..

Debt consolidation loans can be divided into two types: secured and unsecured. Knowing the differences between secured and unsecured debt consolidation loans is the first step in figuring out which type is right for you — or if a loan may not be the best solution after all.


Unsecured Debt Consolidation Loans

Unsecured loans don’t require collateral to secure them. Instead, your loan is based on your creditworthiness, which lenders see as an indicator of how likely you are to pay your loan back according to its terms. Not surprisingly, to qualify for an unsecured debt consolidation loan, you must have exceptional credit, so they are not likely to be an option for bill consolidation if you have bad credit. And even if you do qualify, you could still end up paying a much higher interest rate for this type of loan since lenders consider it much riskier than a loan that’s secured by valuable property.

Personal loans are by far the most common type of unsecured debt consolidation loan, but many people use a similar strategy by using balance transfers to move their debt from one high-interest card to another card that offers lower interest. In essence, the effect is the same — you get a “loan” from the other credit card without putting up any collateral; instead, the credit card companies look at your credit history to decide if they’ll make a balance transfer available.

Just because an unsecured loan isn’t tied to property, that doesn’t mean there aren’t risks. Failure to pay means your credit score will suffer for years to come, and you might wind up going to court or being pursued by collection agencies. And with both types of loans, if you use your paid-off cards to ring up big balances again, you could wind up in an even more difficult financial position.


Debt Consolidation Options for Bad Credit: Secured Debt Consolidation Loans

Debt consolidation with bad credit history is possible, but bad credit debt consolidation lenders are more likely to offer a secured loan. A secured loan is a loan that’s “tied” to collateral, like your home, car, 401K, life insurance policy or savings account. Since a secured loan is in essence guaranteed by valuable property, you can typically qualify with lower credit scores. Some types of secured loans, like home equity loans and lines of credit, may provide access to large amounts of cash, which means it’s possible to consolidate even large debts. Plus, because they’re tied to property, secured loans usually have lower interest rates than unsecured loans, especially if your credit is good.  

The primary downside of a secured debt consolidation loan is that if you wind up being unable to pay the loan back as a result of financial hardship, the lender will seize the property that’s securing the loan - even if that property is your car or your home. That’s a lot of risk to take on. What’s more, with a home equity loan, if your home value goes down, you could wind up owing more than your home is worth.

 

Debt Management: A Better Option

At CareOne, we help men and women take control of their debts and their financial future through comprehensive debt management plans customized for their needs. With a debt management plan, you'll still pay one monthly payment so you'll still eliminate a lot of the hassles and headaches associated with balancing multiple creditors. And you can do it without qualifying for loans or risking your property. To learn more about how a debt management plan can help you get on top of your debt, call CareOne at 1-800-781-0843 or use our online form to request more information today.

If you liked this you may also like:

  • How and Where to Get Debt Consolidation Loans for Bad Credit

    If you’re struggling with debt – as many consumers are – you may be looking for a way to pay off your bills and get back on track financially. Debt consolidation loans for bad credit profiles are one way to get out of debt, but you may be wondering where to look if you’ve been turned down by your bank or credit union. Before you go down the wrong road, take some time to realize there are choices for you, regardless of your credit history and financial situation

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