Secured Loans Versus Unsecured Loans - The Two Common Types Of Debt Consolidation Loans

By Author: Jennifer Todd
Total Articles: 4
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Once you consolidate multiple credit accounts into a consolidation loan, you just need to make single payment each month, eliminate the hassle of making payments that have different due dates. There are many types of loans for debt consolidation, which one should you apply for? You have to know the pros and the cons of these loans in order to decide the best one for debt consolidation.

Secured and unsecured loans are the two common types of debt consolidation loans. Let's explore them one by one:

The secured debt consolidation loans

Secured debt consolidation loans require an asset such home, boat or land to be used as collateral to secure the amount of loan they plan to borrow from a creditor. The lender will normally approve for loan amount equivalent to 70% up to 85% of the asset equity in a secured loan application. Since the risk of lenders is reduced by holding the ownership of the asset, they are afforded to offer secured loans at much lower interest rates because the lenders can execute foreclosure on the asset where ever the borrowers unable to make the repayment on the secured loans.

Secured ...
... loans are the money you borrow from lenders using your asset as collateral. While it is a good option to get a low interest rate consolidation loan to settle expensive debts such as personal loans and credit card balances, you have to make sure you are capable of making the loan repayment until it is paid off. Failing of pay the loan will cause a foreclosure action to be initiated by creditor.

Mortgage refinance loan and home equity loan are the two common secured loans that you can borrow against your home. If you are in process of paying a mortgage, you can go for a mortgage refinance option. It is a way of getting a new mortgage to pay off existing mortgage and use the balance of the loan to pay toward the high interest rate debts. Alternatively, if your home has built up equity, then you can apply for a home equity loan and use the loan to pay off the high interest rate credit card balances and personal loans. In fact, the home equity loan is very similar to personal loan, but at low interest rate as it is a loan that secured against a home. Different from mortgage refinance that you have to use the new loan to pay off the existing mortgage, 100% of home equity loan can be used for debt consolidation purpose.

The unsecured loans

Unsecured loans do not need any collateral and lenders are approving the applications based on the applicants' credit history. The interest rates offered in unsecured loans are dependent on the credit score, the higher the score, the better the rates are. The approved amount is based on the repay capability of borrowers. Since the lenders don't hold the ownership of any asset, they carry higher risk and they only can take a legal action if borrowers default the loan. The unsecured loans carry higher interest rates compare to the secured version. Most personal loans offered in the market are a type of unsecured loan. The applicants need to attach the proof of income and other supporting documents in their application. Lenders will request the credit reports from credit bureau to review the applicants' credit history, if lenders found that the borrower is in high risk of failing to pay a loan due to bad credit, they may not approve their applications; or they may request the borrowers to get one or two co-signers with good credit history to share the responsibility on the loan in order for them to approve the application.

Summary

Generally, the secured and unsecured loans are two common types of loans you can get for debt consolidation. Each loan has the pros and cons that you should evaluate against your benefits before choosing the best type of loan for consolidating multiple debts.

Visit http://www.debtconsolidationmakeeasy.com to find debt advice, tips and sources on how to manage debt situation that you can use to help organize your financial matters.