In the world we live in, getting into debt is not rare at all. In fact, Global public debt has reached a record high of US$ 97 trillion in 2023.
These days, it can be challenging to manage various debt accounts at once. However, it is something that can be helped a lot with the use of a debt consolidation loan. They are readily available through conventional banks, online lenders, and credit unions and come in two forms: secure and unsecured debt consolidation loans.
What are they? What is the importance of these loans? In this blog, I will tell you everything that you need to know about it.
[1] What is a secured consolidation loan?
This kind of debt consolidation loan works just like an unsecured loan; the primary difference is that you are required to put up an asset, normally your home or a vehicle, as ‘collateral’ or ‘security’ for the lender. It implies that if you do not repay the debt, a lender may submit a claim on the asset. Here are your two options with this sort of loan:
- Secured personal loan
It works like a conventional loan that might be easier to access if you have less-than-perfect credit. Since the collateral decreases the lender’s risk, you might be offered less personal interest on the loan.
- HELOC
Both the HELOC and home equity loans allow you to convert a part of the home’s equity into cash. It is the difference between what your home is valued and what you owe. If you consider a home equity loan, you will have the overall amount you borrow in a lump sum and pay back the equal monthly investments. You will have a fixed rate of interest.
HELOC basically acts like a credit card. You can pull the funds out any time you need them and repay only what you have borrowed from them.
[2] What is an unsecured consolidation loan?
With unsecured debt consolidation loans, you are not required to put up collateral to get approval for credit options. I have mentioned some of your options for unsecured loans below:
- Unsecured personal loan
This sort of loan enables you to consolidate your debts to simplify the repayment procedure. You will obtain a fixed rate and a predictable monthly payment. The majority of the lenders feature rapid approval and quick funding times. You might be subjected to a prepayment charge if you consider paying the loan off early.
- Peer-to-peer loan
These loans are generally funded by the individual investors. You might be eligible for the loan even if you do not have the perfect credit. For me, the downside is that the borrowing costs might be higher with poor credit than they would be if you take out a home equity loan. Additionally, these loans come with short repayment periods.
- Balance transfer credit card
If you qualify for this, you might be able to avoid the interest altogether. I have simplified how it works.
Some balance transfer credit cards offer a 0% APR introductory time. After you open the card, you will have between 12 and 18 months to pay down the transferred balance without incurring any interest. You might have to carry out the transfers within a specific window and will usually have to pay 3 to 5% charges on transferred balances.
Wrapping Up
Since you are reading this far, I am sure you now know the main difference between secured and unsecured debt consolidation loans. They both have different offerings that suit different people’s needs. This is why it is crucial to do your research to understand which one would be the right decision for you.
