A debt consolidation loan is one of the most popular ways to get out of debt. It involves gathering up all your other debts, paying them all off with a single loan, and then paying this loan off. It doesn’t reduce how much you owe, but it can affect how easy it is to pay off your debts. Now, these loans aren’t the miracle sent from heaven to pay off your debts.
They have perks, and they have disadvantages too. Debt consolidation experts say you should consider the pros and the cons before getting one of these loans. Understanding how they work and why you should or shouldn’t get them is the first step to paying your debts.
Secured Loans Advantages and Disadvantages
A secured loan is one where you put up an asset you own, such as your car or home, as a security if you default on the loan payment. When a secured loan is taken for debt consolidation, the asset used is usually your car, if you have one. You can also put up claims on your current lawsuits, or even winnings if you win the lottery. The accepted securities change based on the company you’re getting the loan from. Getting a secured debt consolidation loan has advantages like lower interest rates than unsecured loans.
They are more affordable and the interest payments can even be claimed on tax refunds. They do have disadvantages too – you pledge something expensive you own, which will be at risk for the duration of the loan. If you default on payments of the loan, your property could be seized as collateral. Secured loans may also be longer in duration than you might expect.
Unsecured Loans Pros and Cons
Getting an unsecured loan is simple: you need a good line of credit. If your credit is great, the loan will easily be granted to you. There is one huge benefit to consolidating your debt with an unsecured loan – nothing you own will be put at risk of seizure. Other advantages include a shorter term than a secured loan.
Interest payments are still tax deductible too. Disadvantages of unsecured loans include having higher interest rates than a secured loan. This makes it a little harder to afford. You also won’t get this approved if your credit is bad, which can be a problem if you are already in debt.
Work with a Professional to Make the Right Choice
Choosing between secured and unsecured loans can be tough. You have to consider factors like your risk, tax bracket and more. The best way to make the right choice is to avoid doing it on your own. If you don’t have experience with the financial world, you may not make the right decision.
You have to speak to an expert in the debt consolidation game before you pick and apply for a type of loan. Debt consolidation loans as a whole are quite useful, but you should still weigh all the factors before you make a choice.