Eliminating debts becomes essential when people begin to have difficulties making their
payments. Late payments cause creditors to report to the credit bureaus that this is happening,
and these consumers’ credit scores go down. Bankruptcy does not help this situation because it
can be the cause of a dramatic drop in the credit score, and it makes everything more expensive.
One way out of this situation is to obtain one type of debt consolidation loan.
What Are Debt Consolidation Loans?
Debt consolidation loans are loans obtained for the sole purpose of paying several debts that
have high interest rates. It’s advantageous to obtain a loan to pay off other loans and debts
because these loans will have a lower interest rate. If people’s credit has begun to be affected,
they will have difficulties receiving a loan that will help them pay their debts. In this case, they
can use their property to offer as collateral to the lender.
The Secured Debt Consolidation Loan
A secured debt consolidation loan is one that has a piece of property offered as collateral, and it
is said to be secured by the property. The most common form of collateral that lenders accept is
equity in a house. If borrowers have enough equity within their homes, they will borrow a sum of
money based upon the amount of this equity.
Lower Interest Rates Possible with a Secured Loan
These loans are known as second mortgages, and will be repaid each month with an amount
of money that will be less than they were paying when they were making several payments to
several different creditors. Because the loan is secured by property, the loan can have a lower
interest rate. The fact that borrowers will lose their houses to the lenders if they stop making their
monthly payments makes these loans safer for lenders.
The Unsecured Debt Consolidation Loan
If people’s credit scores have not begun to be affected by their financial situations, they may be
able to obtain an unsecured debt consolidation loan. They will not have to risk any property with
this loan, and they may be able to find a very advantageous interest rate if their credit scores are
still in good territory. The interest rate may be higher than if borrowers were to offer collateral,
but they will also be lower than the interest rates they are paying for their credit card accounts.
The Disadvantage and Advantage of the Unsecured Loan
One disadvantage for obtaining the unsecured loan is that they will not be able to write the
interest off on their tax returns as they would if they received a secured loan. Even so, people can
make their unsecured loans as affordable as possible by comparing rates from different lenders.
There may be a lender that is willing to charge a lower interest rate than others, and borrowers
can take advantage of the Internet to find out what each lender’s individual rates will be.
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Neram Lamatao is an internal author for NonProfitDebtConsolidationService.com. She inscribes
an article focusing on non profit debt consolidation, debt relief, credit card debt reduction
and getting out of debt on a selection of financial sites online.