Debt Consolidation Loans The Different Types

We all incur debt at some point in our lives. However, for some of us there comes a time when we need help getting out of debt, especially if our debt has been acquired through the use of credit cards. Credit cards can carry extremely high interest rates that only serve to worsen the individual’s financial situation. In such cases, credit card debt consolidation becomes a necessity. One of the ways to consolidate credit card debt is to solicit a debt consolidation loan. Choosing one of these loans can be confusing as there are a couple different types available. Unsecured Debt Consolidation Loans An unsecured loan is a loan acquired without the use of collateral. Mortgages and home equity loans use a borrower’s home as collateral, so there is some consolation for the lender if the borrower defaults on the loan. Unsecured loans, however, do not have any collateral to collect on if the borrower fails to pay, so they are considered to be much more risky for the lender. As a result of the increased risk, the interest rate on an unsecured loan is typically higher than that of a secured loan. However, the rate is usually still lower than most card rates. If another type of loan isn’t available, an unsecured loan is still helpful in lowering the monthly payments of credit card debt. Unsecured loans can either end at a predetermined time or they can work like a card with a revolving line of credit. When the loan has a fixed term, the interest rate will be fixed as well. However, if the term is not fixed, the interest rate will be variable. The interest on unsecured loans isn’t tax deductible. Secured Debt Consolidation Loans A secured loan is a loan that has been secured with collateral in the form of some personal asset. The asset may be stock, bonds, jewelry, personal belongings, or real estate depending on the lender’s preferences. This type of a loan can be quite helpful in lowering the payments of those laden with card debt, especially those who have already done damage to their credit. Interest rates can be competitive for those with decent credit, but will be considerably higher for borrowers with credit problems. Typically, the value of the asset used must be greater than the amount of the loan. If you have substantial assets to use as collateral, obtaining this type of loan for card debt consolidation can be relatively simple. Real estate is always an acceptable asset, and many lenders will also accept stocks and bonds. It is much harder, however, to find a lender that will accept non-traditional forms of collateral. Choosing a Loan If you have no available collateral but you have decent credit, an unsecured loan may be your only option. Though the interest rate will likely be higher than that of a secured loan, in most cases it will still be lower than what you are paying on your credit. In addition, if you choose an unsecured loan with a fixed term, you will not be tempted to spend additional money like you would with a revolving line of credit.If you have collateral available, however, you might be better off with a secured loan. Regardless of the type of credit card debt consolidation you choose, always shop around before making a final decision. Compare rates and terms from several different lenders so that you can make the best choice possible.