When it comes to debt consolidation, a secured debt consolidation loan is the far superior choice to the unsecured debt consolidation loan if you have the choice. Debt consolidation loans are not a good option for everyone. People who cannot control their spending habits enough to keep from creating new unsecured debt after a debt consolidation loan has been obtained may not benefit from this type of loan. It can prove to be an easy path to becoming deeper entrenched in an already too heavy debt load.
A secured debt consolidation loan is backed by something of enough worth to cover the value of the loan.
The vast majority of secured debt consolidation loans are home equity loans. With this type of loan, the bank agrees to set a loan limit based on the accumulated equity in your house. You use this money to pay off the balances on your debt.
Most debt consolidation loans are used to pay off unsecured debt.
While this type of loan may be used to pay off a car or furniture, the big interest savings comes from paying off unsecured debt like credit cards and payday loans.
A secured debt consolidation loan can easily reduce your average interest rate from above 20% to 6%. This drop can save you hundreds of dollars per month in interest charges if you have large outstanding credit card balances.
Secured debt consolidation loans do not usually have punitive interest rate adjustments built into the fine print.
Credit cards frequently have fine print that warns consumers that if a payment is missed or the credit score dips, the interest rate may double or triple. Since a secured debt consolidation loan is backed by the value of real property, banks do not have to try and immediately cover increased default risk with exorbitant interest rates.
Because many consumers get into credit card trouble by trying to cover emergencies with unsecured debt, a secured equity line gives you some breathing room.
Most people who complete a secured debt consolidation loan find that the monthly payment savings is enough to let them be able to start saving for an emergency fund. Many emergencies only require a few hundred dollars to cover. This amount may very well be produced in the first couple of months after the loan is made.
Banks will sometimes allow a little extra in the credit line in case unforeseen circumstances arise shortly after the loan is made.
This small amount of “extra” cash can be used to cover an emergency that arises while you emergency fund is being built. Also, some of these credit lines make the value of the credit line available as the secured debt is reduced. This means if you must borrow a little more cash, you can do so at the low interest rate of the home equity loan, and it will not alter your payment, which is based on the total amount originally borrowed.