Debt consolidation involves taking a loan to pay off two or more existing debts. Loans not backed by a collateral, such as personal loans from family members and friends, are unsecured loans. Debt consolidation backed by a collateral, such as secured personal loans, a second mortgage on the home, an advance on an existing mortgage, or a re-mortgage are examples of secured debt consolidation.
Secured debt consolidation is another term used to describe a home equity loan or a second mortgage on a fixed asset. Home equity refers to the worth of a home; when a homeowner takes out a “home equity loan,” he is taking a loan out against his house in order to get a higher amount of credit and more favorable interest rates.
While secured debt consolidation is easily available, it must be availed only after due consideration of the benefits as compared to the drawbacks.
The biggest risk involved with secured debt consolidation is that it puts the house at risk. If the homeowner defaults on payments, he must then forfeit his house.
Secured debt consolidation is long term in nature. These loans often run for a length of twenty to thirty years. Although the interest rate is not very high, the long tenure of the loan means that at total repayment being made towards the secured debt is more.
However, the option of secured debt consolidation is not without its benefits. The immediate cash outflow of the borrower falls drastically, thereby reducing the stress and tension that the multiple payments and varying rates of interest caused. The smaller monthly payment provides the borrower with breathing space to sort out his finances.
If the amount involved in the debts being consolidated is high, the client is offered secured debt consolidation only. Unsecured consolidation loans bear a high rate of interest and provide very little relief to the borrower.
It is important to realize that secured debt consolidation is the best solution to debt crisis if the consolidation is accompanied by an improvement in financial planning and by disciplined borrowing.
Further Reading:
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