Not every bump in the road should send your thoughts to bankruptcy. Everyone has to deal with financial obligations including medical bills, dental bills, health insurance premiums, car payments, house and student loan payments. There are several other emergency and unexpected expenses that only add to the financial hurdles, but that is not reason enough to just give up. All you need is a boost that can see you through the rough patch. Instead of bankruptcy, you should consider a debt consolidation loan.
How do secured loans and unsecured loans act as debt consolidation loans?
A debt consolidation loan is either a secured loan or an unsecured loan that can pay off your small and medium dues. It provides the impetus to the borrowers to start afresh with just one monthly payment at flat interest rates. The right consolidation loan is also supposed to lower the monthly sum and reduce the APR. All in all, it helps the lender to manage their finances much better thanks to the simplification of the payoff.
Loans that have collateral are secured loans. For example, your home mortgage or your vehicle title loan are classic examples of secured loans. In each case, you promise security for repayment. If you fail to pay for a month, the loan company can foreclose your home or seize your car depending on which one you fail to pay.
Unsecured loans do not have any security. Companies lend the money solely based on borrower’s reputation, financial behavior, and payment history. Unsecured loans are not new or foreign at all. Credit cards are unsecured loans that we deal with every day. They bear higher interest rates since the risks are significant as well.
Since there is no hard and fast rule regarding how you can spend the loan amount, you can always use either a secured loan or an unsecured loan to pay off your smaller debts.
Secured loans as debt consolidation loans
Here are a few types of secured credits that you can use as consolidation loans –
- Home equity loans
- Vehicle title loans
- 401K loans
- Loan against an insurance policy
In each of the cases, the cost of non-payment is very high. Although you will enjoy lower interest rates and amicable APRs, the stakes are always too dear. You can end up losing your house, your car or your retirement savings over a couple of hundred dollars. On top of that, unless you pay the loan back entirely, you will not be able to access your 401k funds or your life insurance. That gets further exacerbated by the extensive repayment period of any secured loan. You cannot pay off the sum before term as it can attract penalties. As a result, your total expense (payments, interests, and stakes) might just be much higher than the summation of interest on individual debts.
On the other hand, you will be able to enjoy lower monthly payments since secured loans always attract lower monthly interests. In many cases, the interest payments become tax deductible. You need to talk to your debt counselor or your tax advisor for further details on tax deduction allowance. Availing a secured loan for consolidating your debts can significantly lower your monthly burden of payments, even though you may end up paying more than you had planned.
Unsecured loans as consolidation loans
Credit card users know the kind of interests and APR they have to pay. Since credit cards are unsecured loans too, this gives the users a pretty good idea about the range of interest rates on these loans. In fact, the average interest rate is always higher than a secured loan.
According to experts at nationaldebtrelief.com, taking out an unsecured loan is much safer. There is no property involved in the payment process, and there is no risk of losing your life savings. Even with the higher interest rates, you will save much more. They always bear lesser charges than the multiple credit card balances.
The most prominent challenge is qualifying for a consolidation loan. Since it is an unsecured loan, it comes with stringent qualification criteria. If your credit scores are too low or if you have a history of unpaid debts, you will find it extremely difficult to convince a debt consolidation agency to lend you the lump sum.
In addition to that, there is the matter of balance transfer via credit cards. A balance transfer is trickier than it looks since 0% interest credit cards always come with a transfer fee. Most of the times, this charge is significantly high, and it defeats the entire purpose of consolidation. However, if you are dealing with multiple credit card debts, it might be helpful for you to talk to a credit counselor or a debt counselor. He/she can help you prioritize your credit card bills by due amounts and interests payable. Sometimes all you need is a touch of an expert to sort your finances out for good!
The most significant con of debt consolidation loan
While the financial relief that comes with consolidation can help you breathe freely for a couple of days, it can also bring forth undeserving confidence. It can be quite disastrous since people who are barely recovering from their previous financial fiascos often go on spending binges merely because they feel relieved. That can only make the situation worse. Do not let that temporary feeling of ecstasy take over you. Control your expenses and monitor your budget carefully if you want to get off the hamster wheel of debt.
Debt Consolidation loans are real loans that you can take out to pay off your smaller debts. However, do not forget that you need to repay them within repayment term. Only opt for this kind of a loan when you see no other feasible alternative. Pick a company that cares about their clients. Check their ratings and reviews on third-party business directories before you commit. Not all consolidation agencies can offer you lower payments and amicable rates; it is your responsibility to find the one(s) that work for your finances.