Some consumers shop for loans to consolidate their debt without realizing that there are many different types available. Some loans feature an interest rate that is fixed for the term of the loan.
Others have a variable rate that is a certain percentage above the base rate, causing their monthly payments to fluctuate.
However, the presence or absence of a guarantee is arguably the biggest difference between debt consolidation loans. Unsecured loans require no guarantee, while secured debt consolidation loans do.
In terms of debt consolidation loans unsecured means exactly what it sounds like: the loan is not guaranteed by any asset. A borrower simply signs a promissory note to repay the loan according to the terms and conditions outlined within the paperwork.
In the event of a default, the lender must pursue collection and then legal action. This can be very time-consuming and in the current economy, many lenders are finding themselves writing off a record number of debt consolidation loans.
When they apply for debt consolidation loans, bad credit consumers may be in for rejection
Despite their apparent willingness to provide help, many lenders will not offer this segment of the population debt consolidation loans unsecured by an asset.
Instead, these prospective borrowers must look for secured debt consolidation loans.
Though this funding generally features a lower interest rate, it may not when the borrower has a poor credit score. In addition, the individual must be willing to supply a valuable asset, most often the car or home, as a guarantee of loan repayment.
This just goes to show how far-reaching the effect of bad credit can be. Many people wait until their credit has been affected before applying for these loans, literally making it more difficult for them to be approved for debt consolidation loans unsecured by anything.
Those who take action before their debt decreases their credit score find themselves in a much better situation.
For consumers confident about being able to repay their debt consolidation loans unsecured or secured may seem irrelevant
However, even the most certain borrowers can encounter a financial crisis that renders them unable to pay their loan for a certain period.
In this case, the home may be repossessed by the lender and used to repay the loan, a very unpleasant situation that could leave the borrower homeless.
When shopping for debt consolidation loans online, consumers should read the fine print to determine whether the loan is secured or unsecured. This way, they will not end up inadvertently applying for a secured loan and risk losing their home.
A secured debt consolidation loan should only be taken when no other option exists.
Being informed and doing some comparison-shopping help consumers find the best debt consolidation loans unsecured by a home or car. Timely loan payments whittle away the debt balance until it reaches zero.
Once the loan is repaid, consumers can begin living within their means using a budget so they can avoid needing any consolidation finance in the future.
