Difference between a Secured and Unsecured Debt Consolidation Loan

There are differences between a secured debt consolidation loan and an unsecured debt consolidation loan. If you are struggling to pay back a lot of debt you will require a cool head to make a choice on what type of loan you would require depending on your priorities. The following are the major differences between the two consolidation loans.

1. The first difference between the two types of loans according to the website Debt Consolidation Slowdown is that of collateral. To get a secured loan you will have to show proof that you have an asset that is greater than the total amount you are applying from the financial institution. The most common collateral that is demanded is that of a house. However some institutions can also grant a secured debt consolidation loan based on the values of shares held or any other valuable commodity. This is the opposite of an unsecured debt consolidation loan which does not need any collateral to be approved. All that is usually required is a good credit rating in order to get an unsecured loan.

2. Whereas for a secured loan you can apply for a lot of money that ranges from £3000 to £100 000 this is not the case with an unsecured loan. Mainly due lack of collateral it is more risky to give out an unsecured debt loan so financial institutions do not give out a lot of money. In the United Kingdom unsecured loans typically range from £1000 to £25 000 as cited by Best UK Loans. Secured loans then tend to cater more for the businesses while the unsecured loans are mainly personal loans.

3. Another aspect that separates the two is the rate of interest that is charged on the loans. An unsecured loan has a higher interest rates charged rather than a secured loan. Due to the risk factor an unsecured loan will always come with high interest rates. So it is crucial to look at the interest rates before taking an unsecured loan. On the other hand a secured loan usually has a reasonable interest rate because the financial institutions know that they will not lose money since they can always attach an asset in the event of any default on the loan.

4. These two loans also differ in the length of repayment. A secured loan is usually paid over a long period of time which can run into a number of years. On the other hand an unsecured loan repayment plan is limited. The money is usually payable in less than one year.

5. A big distinction is that for a secured loan the failure to payback a loan is usually costly. Should you default on payments that are due after a short period of time your collateral will be sold so as to recover the money that is still outstanding. So by taking a secured loan it is crucial that you should have the ability of paying back the loan with minimum difficulties. This is different from an unsecured loan which has no collateral and the creditor only has the option of suing the debtor rather than attach property.

Understanding these differences between the secured and unsecured debt consolidation loan is important for a better financial future. If you fail to make the correct choices when it comes to dealing with debts, it can come back to haunt you.