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Comparing A Secured And Unsecured Loan For Debt Consolidation

Managing a lot of debt can be extremely stressful, with a number of payments that have to made every month and a wide possible range of interest rates. There are a number of options for addressing it, such as credit counseling or credit repair companies. One of the more effective methods of dealing with a lot of debt, especially if some or all of it is high interest loans like credit cards, is a debt consolidation loan. There are essentially two options here - secured or unsecured.

First, a quick explanation of how debt consolidation loans work. It is basically a loan for the total amount of debt a person owes. This money is then used to pay off all the separate debts and payments only need to be made on the consolidation loan from that point forward. This has two main benefits - first, it means there's only one payment to worry about every month and second, it usually has a lower interest rate than the debts that are paid off (especially in the case of credit cards).

Secured vs Unsecured

A secured consolidation loan means that you need to provide some sort of collateral as a guarantee for the loan. This way, if you were to default on the loan and not repay it, the lender could recover their money from your collateral.

An unsecured loan means that you don't have to put up any specific collateral, the lender loans you the money based on the strength of your financial history and credit rating.

Unsecured consolidation loans tend to be harder to qualify for, simply because many people who are looking for one have a bad credit history. This makes them a higher risk for the lender, and unless they have considerable assets and a good history with that lender, they will probably not qualify.

Secured loans tend to be the most common because the lenders have some assurance that they won't lose their money. Collateral for these loans is most often something significant, like the equity in your home or a vehicle.

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