When it comes to debt management, people have a series of options. They can pursue debt settlement or enlist the services of a credit counseling company. There are other options too. One popular choice is to get a loan that can be used to consolidate debt. Essentially, you take out a lower interest loan to eliminate your high interest debt. This can save people money in the long run as well as provide them with easier repayment terms. There are two categories of debt consolidation loans.
A secured loan means that you are using collateral to secure the debt. The most common form of collateral is your home, which can be used to obtain a home equity loan or to refinance your mortgage. However, other lenders may accept other forms of collateral, including jewelry and stocks. Typically, using collateral to secure a loan means that you stand a better chance of qualifying. Lenders are going to be more willing to lend you money if they know they have recourse should you default. Therefore, secured loans have less stringent credit requirements. Also, the interest rates will be much more favorable than the interest you are paying on the debt you owe. On the downside, you are risking your collateral. This is especially serious if you put your home on the line. Before pursuing this option, you should make sure you can afford to repay it.
As the title suggests, an unsecured loan is one that doesn’t require collateral. This is appealing to the borrower because they don’t have to risk an asset such as their house. It is also appealing because the interest rate will be better than any credit card. However, lenders are more hesitant about unsecured loans. The credit requirements are stricter for an unsecured loan. Another disadvantaged is that interest payments on your unsecured loan are not tax deductible, where as they are on a secured loan. Also, while rates are more favorable than those of a credit card, they will likely be higher than those of a secured loan. This is to account for the limited recourse that the lender has should you default.