Whether you are teetering on the edge of bankruptcy or just trying to better manage your finances, you can’t help but notice all the advertisements touting debt consolidation. Read on to learn about the different debt consolidation options and the pros and cons of each.
Debt consolidation is not the same as debt settlement.
In debt consolidation, you pay your debt in full with no negative consequences to your credit.
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. Unsecured loans usually have a higher interest rate because they carry more risk for the lender.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.