The Real Facts about Secured Debt Consolidation

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By Michelle Tuvey.

Loan Underwriter

Debt consolidation loans are often marketed with lofty promises and numbers that may be difficult to understand. However, as with every other form of consumer lending, secured loans have both good and bad aspects. Consumers need to be careful to understand the details of secured debt consolidation so they do not find themselves in a worse position by taking on a new loan.

To help you get a better handle on what debt consolidation is all about, we have put together the real facts in categories of both good and bad. When you understand these facts, you will be able to apply them to your own situation so that you can determine whether secured loan debt consolidation is right for you or not.

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The Good

A secured debt consolidation loan can be helpful to people who find themselves struggling to keep up with high-interest debt. Many consumers use secured loans to consolidate debt so that it is more manageable. Here are the three primary points you need to know regarding the good aspects of secured loans:

  1. Positive Credit Influence – Simply adding another loan to what you already have would present a negative influence to your credit rating. Secured loans do not work that way. Because you are using the money as a debt consolidation tool, there is no negative impact on your credit as long as you make your payments on time.
  1. Lower Interest – Though there are exceptions to the rule, most debt consolidation loans result in lower interest rates. If rates are low enough, you could save substantially over the life of a secured loan.
  1. Monthly Payments – One of the driving forces behind debt consolidation is that it results in lower monthly payments. This can be a lifesaver if your budget is already strained.

The Bad

No form of consumer financing is 100% free of risk. Furthermore, it always costs money to borrow money. These two factors combine to present some negative aspects to debt consolidation. Here are the facts you need to know:

  1. Security – A secured loan gets its name from the principal of the borrower offering some piece of tangible property as a guarantee of repayment. In most cases, this tangible property is the borrower's home. Understand that your home could be repossessed and sold if you fall behind on your loan payments.
  1. Loan Terms – Secured loans provide for longer repayment terms of between 5 and 25 years. So even with a low interest rate, you could end up paying more over the long haul if it takes you 25 years to settle the debt. Consider loan terms carefully.
  1. Interest Rates – Borrowers get better rates on secured loans most of the time. Nevertheless, that might not be true for someone with bad credit. A poor credit rating could result in interest rates high enough to make borrowing not worth it. Also bear in mind that your interest rate might change over the life of your loan. Be sure to understand the difference between a fixed and variable rate.

One final word of caution: consolidating your debts into a secured home loan is very risky if you do not change your spending habits. One example is that of credit cards. If you are applying for a secured loan in order to pay off high interest credit cards, and you do not close those credit card accounts after paying them off, there is a real temptation of running up future credit card debt again. This would put you right back in the same position with the possibility of having more debt than what you started with.

A sound secured debt consolidation strategy can be effective in helping consumers get back on solid financial ground. A poor strategy can be financially detrimental. If you are not sure of the best way to manage your debt problems, get some free advice from our secured loan experts before making any decisions. Just call our friendly team for confidential help and advice today.

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