Friday, March 02, 2007

Debt Consolidation with a Secured Loan

If you are like many consumers, you probably owe too much on your charge cards. It's not hard to do; shopping with a charge card is so easy that it takes almost no effort. If you don't pay in full every month, your outstanding balance can grow, and soon, you realize that you owe an uncomfortable amount of money.

If this happens with multiple credit cards, you can wind up having to pay more money each month than you can afford, even if you just pay the minimum amount. One solution is debt consolidation, where you take out a new loan in an amount that is equal to the total of all of your debts.

The easiest way to consolidate your debt is by applying for a secured loan. A secured loan is one where you offer collateral to the lender in exchange for the loan. Collateral-backed loans are ideal for consumers who have an unfavorable credit history or who simply don't have a long track record of financial transactions. Providing collateral gives the bank or credit union some additional assurance that you will repay the loan.

The most frequent types of collateral for such loans are either homes or cars. Lenders prefer these items, as it is easier to come up with a value for them and they are easy to sell should it be necessary. By offering collateral for financing, you should be able to get a more favorable interest rate than for an unsecured loan. Credit cards, for example, offer unsecured borrowing, and interest rates for charge cards are often in the range of 20% annually.

The two factors that lead to lower payments are lower rates and a longer period of repayment. A typical home equity loan, which would use your house as collateral, might have a repayment term of 10-15 years. The relatively long period of repayment, in addition to the lower interest rates that come with equity loans, should make your monthly payments lower. Keep in mind that you are risking your personal property with a secured loan. If you fail to pay, you will lose your collateral to your lender.

Seeking out a secured loan for debt consolidation purposes can help you clean up you financial problems. You will still have to exercise some discipline, however, as the consolidation loan, like all financing, has to be paid off. Neglecting to do so will put you in financial trouble again.

No comments: