Getting Out of Debt: Secured vs. Unsecured Debt Consolidation Loans

When you’re having trouble paying your bills, it can take the joy out of day-to-day living.

Between past-due notices from creditors, telephone calls from debt collectors, and worries about losing a car or even a home, you might feel as though you are running out of options.

While you can’t erase your bills, there are options available to help make your payments easier to manage.

Debt Consolidation At-a-Glance

• There are several options available for you to help manage your debt
• Debt consolidation means one monthly payment to pay off all of your debts
• Some debt consolidation loans come in the form of secured loans
• Personal loans for debt consolidation are unsecured
• If debt consolidation works for you, you may be able to renegotiate some of the amounts you owe

It may help to know that when it comes to worrying about your debt, you’re not alone. Even in good financial times, many people face an economic crisis at some point in their lives.

The reasons for having too much debt are numerous: it can be the loss of a job, overspending, or a personal or family illness. Regardless of the reason for debt, it can seem overwhelming.

More often than not, your financial hardships can be overcome, keeping your situation from going from bad to worse.

Your Debt Relief and Consolidation Options

There are options available to help you get out from under mounting debt.

Available options include credit counseling, debt settlement, debt management, debt consolidation, and debt relief.

Credit Counseling

Consumer credit counseling is available through nonprofit credit counseling services.

When you see a consumer credit counselor, you’ll learn about budgeting, debt reduction, debt negotiation, and more.

Consumer credit counseling is a long-term solution for the problems that have caused people to get into debt in the first place.

Debt Settlement

You can work with a credit counselor or debt management company to settle debt, but you can also do it yourself.

When creditors agree to debt settlement, they are agreeing to take less that the amount you owe as payment in full.

If done through a debt relief or debt management company, your debt counselor will renegotiate with the creditors on your behalf.

Debt Management

You can work with a debt management organization that will help you get your finances in order and come up with a plan to pay off your debts.

Typically, the debt management company will take one payment a month from you and disburse the amounts you owe to your debtors.

Debt management companies can help you lower your payments into one payment you can afford by negotiating with your debtors to accept lower payments each month.

Debt Consolidation

One of the ways in which you can lessen your financial burden is through debt consolidation. Debt consolidation is the process of getting one loan with a single monthly payment to pay off all your debts. The single payment is usually much less than the total of the minimum payments on the number of loans or debts.

Debt consolidation works similarly to debt management, but rather than working with a debt management company, you take out a loan for the amount you owe, pay off your high-interest debt, and get one lower payment by doing so.

Typically, debt consolidation occurs when someone is paying credit card debt.

Credit cards can carry a much larger interest rate than even an unsecured loan from a bank. Even if you’ve received an introductory rate for a credit card, once that rate has expired, your payments could go up to double or triple what you were paying, making payments sometimes difficult to keep up with.

Debt Relief

Debt Relief has some aspects of debt management and debt settlement. Debt relief may consist of using a debt management company to help you manage your debt and negotiate with debtors to pay less than you owe to settle the debt.

How do you know which will work best for you? It depends on the debt level, how much self-discipline you have, and the prospects for your future.

What Kinds of Debt Consolidation Loans Are Available?

Debt consolidation loans are available through banks and other financial institutions.

There are even finance companies that specialize in loans to pay off credit card debt.

Unsecured Debt Consolidation Loans

Debt consolidation loans are unsecured debts. This means that when you get one of these loans, you won’t have to put up collateral for the loan. Unlike a home equity loan used to pay off your debt, your house isn’t used as collateral, and unlike a title loan, your car isn’t used as collateral.

Of course, you have every intention of paying off any loan you get, but if something happened and you had trouble making payments, your house would not be at risk of foreclosure.

When you get a home equity loan or a cash-out refinance on your home to pay your debts, you’re putting your home up for collateral. You’re not getting out of debt, you’re just trading one debt for another.

The same goes for debt consolidation loans. You’re trading one high-interest, high-payment form of debt for a debt with a better interest rate and lower payments. The lower interest and payments, however, make it easier for you to pay back the debt.

Secured Debt Consolidation Loans

Some debt consolidation loans require collateral to secure the loan. If you have equity in your home, the debt consolidation might take the form of a home equity loan.

A home equity loan is a second mortgage or debt secured with the equity in your home.

For example, if your house is valued at $150,000 and your mortgage is $120,000, then you have equity of $30,000. This amount could be borrowed to pay off high-interest credit cards and accounts. The interest rate is generally much lower, making the payments more affordable.

When you own property such as a home or a car, you may be able to get a lower rate through a secured loan using that property as collateral.

Remember that failure to pay the second mortgage could result in losing your home to foreclosure. Remember that these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home.

The Bottom Line

If you’re thinking about getting help with your financial situation, such as debt consolidation, make sure you research all options available to you.

Learn the kinds of services a business provides and what it will cost you. Consider other people’s experiences.

This is a major decision that involves spending your money, a decision that could go toward paying down your debt and helping you get out from under your financial burden.