Debt Consolidation - Secured Or Unsecured Loans?

Debt consolidation is the process of replacing a number of expensive, high-interest debts with a single loan at a favorable rate. By reducing the interest rate in addition to the number of debts, the borrower has the chance to pay back debt faster than before.

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

A collateral-backed loan is probably the most commonly employed financial tool to combine bills, using collateral that provides a bit of a guarantee to the financial institution that you will repay. In exchange for providing collateral, you do receive some advantages - you can likely obtain more money than you can with an unsecured loan, and the rate that you pay will likely be more affordable. The most frequently used forms of collateral are homes and vehicles; it is simple to establish a value for them and they are easy to sell should you not repay your loan.

An unsecured loan uses no collateral; the financial institution just lends you the money in exchange for a promise to pay it back. An unsecured loan can be harder to obtain than a secured one, particularly if your credit history is less-than-ideal. Unsecured financing comes with a price, as the rates tend to be quite a bit higher than for secured loans. An advantage for the debtor would be that there is no built-in risk of forfeiting property, such as a house, should he default on the loan.

The offer of collateral to the bank or a credit union goes a long way towards obtaining a favorable rate. Borrowers can get the best price by looking for secured financing. For the vast majority of borrowers, collateral-backed lending generates the best financial leverage towards paying off a stack of debts. As the rates are steeper, trying to consolidate such bills with additional unsecured loans may leave the borrower simply treading water. If you are in doubt as to what might be best for you, talk to a lender.

Charles Essmeier is the owner of Retro Marketing , a firm devoted to informational Websites, including DebtGoAway.net, a site about debt consolidation and credit cards, payday loans and personal bankruptcy.

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