Secured vs. Unsecured Debt Consolidation
What is Secured Debt Consolidation?
More often than not, debt consolidation comes in the form of a secured loan. A secured loan is one that requires the borrower to give an asset, or collateral, to the lender. This ensures that the borrower will pay the full amount owed so that they can have their asset or assets back. Typically, these assets include second mortgages on houses and title loans on cars.
Advantages and Disadvantages of Secured Loans
Because the payday lender is protected with the collateral from the borrower, the interest rate of a secured loan is typically lower than that of an unsecured loan. However, if the borrower cannot repay the loan, then the payday lender has the right to take possession of the asset in question.
What is Unsecured Debt Consolidation?
Unsecured debt consolidation or an unsecured loan refers to any amount given by a lender to a borrower, but without the cushion of collateral in place. Therefore, the debt is not protected against bankruptcy or liquidation. The lender is relying completely on the borrower’s word, and if they don’t come through and pay back the loan, the lender is basically out of luck. They wouldn’t be able to collect any assets or collateral as a form of payment, so most lenders prefer a secured over an unsecured loan.
Advantages and Disadvantages of Unsecured Loans
Unsecured loans can put the borrower at a disadvantage because of the fact that most will have a higher interest rate than secured loans. However, the only requirement in most cases for an unsecured loan is a signature and a verbal or written agreement that they will pay back the loan in full. They do not have to put up any assets to be used as collateral that have the potential to be seized if they cannot repay the amount they borrowed.
How to Distinguish Which Type of Debt Consolidation is Right for You
Debt can be overwhelming enough as it is without trying to decide the best way to get out of it. If debt consolidation is a new concept for you, here are a few tips that will help you figure out if a secured or unsecured loan is the right route for you to take.
- If you are unwilling to put up any kind of collateral in order to receive your loan, then an unsecured loan is the way to go
- Unsecured loans are usually best for small, non-emergency purchases
- One of the most common types of unsecured loans comes in the form of a credit card
- If you need to make a big purchase and don’t mind putting up collateral such as a second mortgage, then a secured loan is probably the right one for you
- Secured loans are typically used for emergency purchases
- If you don’t want to pay a high interest rate, then a secured loan is definitely the best option