If you have many unsecured debts to pay off, you can turn them into a single monthly payment through debt consolidation. When you consolidate your debt, you won’t have to manage different payments, interest rates, payment dates and payback periods. You’ll eliminate confusion and make the process of repaying debt more manageable. See this year’s Top Debt Consolidation Companies here.
While there are several debt consolidation strategies at your disposal, a debt consolidation loan is a popular option. A debt consolidation loan is a personal loan you use to combine multiple debts with a new one, ideally with a lower interest rate and more favorable terms. You’ll receive a lump sum of cash to pay off your debts, and then make a single monthly payment on your new loan.
Once you figure out all the unsecured debt you owe, use a debt consolidation loan calculator to get an idea of how long it will take you to repay them. The calculator compares the cost of all your debts versus the cost for a debt consolidation loan. It can help you determine how much money you can potentially save.
Secured vs. Unsecured Loans
When you take out a secured loan, such as a mortgage or a car loan, you pledge certain property, such as your home or your car, to secure the repayment of the loan. For example, when you obtain a mortgage loan, your house is security for repayment. If you fall behind, the mortgage holder can foreclose on your house to satisfy the loan.
Unsecured loans are based only on your promise to pay and are not secured by any property that can be foreclosed or repossessed to pay the loan. Credit cards are examples of unsecured loans. Unsecured loans usually have a higher interest rate because they carry more risk for the lender.
Debt Consolidation Through Secured Loans
There are many options for debt consolidation using secured loans. You can refinance your house, take out a second mortgage, or get a home equity line of credit. You can take out a car loan, using your automobile as collateral. You can also use other assets as security for a loan. A 401K loan uses your retirement fund as collateral. If you have a life insurance policy with cash value, you might be able to obtain a loan against the policy. A variety of financing firms will also loan you money against lawsuit claims, lottery winnings, and annuities.
Debt Consolidation Through Unsecured Loans
While unsecured personal debt consolidation loans used to be quite common, they are less likely to be available to people who need them today. Generally, an unsecured loan will require the borrower to have very good credit. Accepting a no interest, or low interest, introductory rate on a credit card is often used as a substitute for an unsecured personal loan for debt consolidation.
It’s important to note that if you consolidate your debt into a longer repayment period, at a higher interest rate, or if there are additional costs and fees associated with the loan, you may pay more money over the life of the loan. Be sure to calculate your total cost under each scenario before determining which route is better for you.
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