Secured debt consolidation loans, unlike unsecured debt consolidation loans, require collateral to secure the loan. This has both advantages and disadvantages. Before choosing a secured consolidation loan, you should be aware of both. You should also be aware of how they work and how to choose the right one for you. By understanding this information, you can make an educated decision about your credit future.
What is a Secured Debt Consolidation Loan?
A secured debt consolidation loan allows you to take certain debts and roll them all into one loan. This enables you to make one monthly payment to one lender instead of numerous monthly payments to multiple lenders. This can make paying your debts off a little less confusing but it does come at a cost.
To obtain a secured consolidation loan, you must have collateral. This collateral must be something that is of value. Homes are the most commonly used type of collateral. Should you default in your loan, the lender can foreclose on your home, leaving you in a difficult situation.
Benefits of Secured Over Unsecured Loans
While there is a risk of losing collateral in a secured loan, it is often the consolidation loan of choice. This is because interest rates are generally lower with consolidation loans. Because the lender has collateral, they are taking less of a risk by lending you money. Their reduced risk means savings for you on the life of your loan.
It is also easier to get approved for a secured loan. Again, this is because the risk is lower for the lender;. They are able to extend credit to people with not so perfect credit because they know that, should you default, they have a backup source for retrieving their investment.
How Secured Loans Can Damage Your Credit
If you are planning on using your debt consolidation loan to pay off credit card debt, you can significantly damage your credit score, particularly in the short run. This is because, by closing out your credit card, you are showing an inability to effectively manage your credit. This drops your credit score. While you may be able to recover from this in time, it will not happen overnight. This is an unexpected situation that many individuals seeking a secured loan are unaware of.
Beware of Loan Sharks
Not all lenders are honest. Some may use illegal practices to secure your loan, placing you at serious risk. If you are looking for a secured consolidation loan, make sure you take the time to find a reputable lender. Check their Better Business Bureau rating and check online forums for complaints before ever obtaining a loan with a lender.
Improving Your Credit Before Obtaining the Loan
Currently, a good credit score is considered to be 720. At this score, you can receive much better interest rates. There are many lenders, however, that will still offer you reasonable interest rates if your credit score is above 650. If you are below 650, you have a low credit score.
If you have a really low credit score, you may want to find a way around the consolidation loan, at least until you can increase your credit score. This is because, should you be approved for the loan, despite your bad credit, you will likely receive a higher interest rate on the loan than you would have with a better credit score.
Using Debt Consolidation to Increase Your Credit
Some companies will try to fool you into thinking that you can increase your credit score with a consolidation loan. While this may be true in the long run, especially if you make all of your payments on time, this is highly unlikely. This is especially true if your consolidation loan is your only form of credit. Your credit score is affected by a number of factors and one loan cannot change your score completely.
Using Online Lending Tools
Online lending tools allow you to input all of your information, including the loan amount and the amount of debt you want to put into the loan. These tools compare your information to lenders all over the country. Once the data is compared, the tool is able to determine which consolidation lenders are best for you. You will then receive a call from the matching lenders.
This has both advantages and disadvantages. On the advantages side, it does help you find the best rates quickly and easily. On the disadvantages side, however, you may get tired of being called by the multiple lenders since some of them can call up to three times per day.
No matter your reason for choosing a secured consolidation loan, great consideration should be made on a number of variables and factors. Failure to do so can result in serious consequences. For those that take the time to understand consolidation loans, however, it is the wisest decision they have ever made.