Debt Consolidation - Secured or Unsecured Loans?

The advertisements on television seem ubiquitous, suggesting that if you have too much debt, you just need debt consolidation to end your debt problems. Getting out of heavy debt is more complicated than merely taking out a loan, as you actually have to pay back your debt to get out of trouble. The right debt consolidation loan can simplify things, as you will have to make only one payment each month, but the wrong loan can actually cost you more.

Debt consolidation is the process of replacing one or more costly, high-interest loans with a single loan at a reasonable interest rate. By reducing the interest rate as well as the number of debts, the individual has the chance to pay back debt more quickly than before.

There are two ways to obtain funds to consolidate your debt; each has its good and bad points. An unsecured loan can be used to pay down financial obligations and a secured loan, which requires collateral, can be used as well.

A collateral-backed loan is probably the most frequently employed tool to combine bills, using collateral that offers a bit of a guarantee to the lender that you will repay. The most frequently used types of collateral are homes and vehicles; it's easy to determine a market value for them and they are easy to sell should you default on your payments. In exchange for providing collateral, you do receive a few advantages - you can probably borrow more money than you could with an unsecured loan, and the rate that you pay will almost certainly be more affordable.

An unsecured loan requires no collateral; the bank simply lends you the money in exchange for a promise to pay it back. An advantage for the debtor would be that there is no built-in risk of losing property, such as a car or a home, should he default on the loan. An unsecured loan can be much harder to get than a secured one, particularly if your credit is poor. Unsecured financing comes with a price, as the interest rates tend to be quite a bit higher than for secured loans.

The offer of collateral to the bank or a credit union goes a long way towards obtaining a favorable rate. For the vast majority of borrowers, collateral-backed financing provides the best leverage towards paying off a heap of bills. Borrowers can get the best loan by looking for secured financing. As the interest rates are steeper, trying to consolidate such bills with more unsecured debt may leave the cconsumer simply going nowhere. If you are in doubt as to what might be best for you, consult with a bank or a credit union.

Article Source: http://articles411.com

©Copyright 2007 by Retro Marketing. Charles Essmeier is the owner of Retro Marketing , a firm devoted to affiliate marketing, and Debt-Stopper.com, a site about debt consolidation and credit reports, personal bankruptcy and other financial matters.

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