Most of us take out loans from time to time to finance our projects or meet our financial obligations. While debts can be quite beneficial, they can also grow into huge problems when you fail to pay the installments on time. Fortunately, there are certain things that you can do to save the situation and avoid ruining your credit score. Here, we will try to answer the question why a secured debt consolidation loan should be your last choice.
Debt consolidation can help you reduce your interest rate or monthly installments of your existing loans. However, not everyone can benefit from this solution and there are many ways to a consolidate debt so you should find out which one is the best for you.
What is Debt Consolidation?
Debt consolidation can be defined is the act of combining all your debts into one account with either a balance transfer credit card or a loan. It has several benefits including a single payment that makes it easier to manage your finances, possibly lower interest rates, and your debt potentially spreading out over more time making every monthly payment relatively affordable. By paying lower interest rates, it means you are able to save money.
When you do it well, a debt consolidation loan can assist you get out of debt faster or restore your credit. But you need to be careful not to confuse debt consolidation with debt settlement. The latter will enable you to pay less than you owe. However, the process it entails will be detrimental to your credit score and can affect your credit report for seven years. Financial experts usually advise consumers to avoid a debt settlement as much as possible.
Types of debt consolidation loans
There are two types of debt consolidation loans namely secured and unsecured. Basically, a secured debt consolidation loan entails using an asset such as a car or a home as a security for a loan. On the other hand, an unsecured debt is not backed by any collateral or asset attached to it.
Secured loans have a low interest rate. However, if you take out a secured debt and default, the lender can seize your asset. This is the reason why a secured debt consolidation loan should be your last choice. Experts recommend that you save home equity for certain situations. An unsecured debt, just like a balance transfer credit card is a safer and preferable way to consolidate for consumers. Lenders prefer giving out secured loans because they are less risky for them as compared to unsecured loans.
There are situations when it is feasible to consolidate a debt. It makes sense to consolidate a debt if you have many credit cards or debts at high interest rates. This will make it quite easy to manage the debt. This is because it is a daunting task paying multiple debts since you can easily forget to pay some and harm your credit score. It is also a good idea to take out a loan if you have a sustainable budget and a payoff plan.
There are several other ways in which you can consolidate date;
1. Debt consolidation loan
Getting a debt consolidation loan involves taking out a personal loan with a credit union or bank. It has a fixed interest rate which is better than a credit card which has a rate that keeps changing.
2. 0% APR balance transfer credit cards
These are becoming quite hard to get nowadays due to the pandemic. Some credit cards have offers of 0% APR on balance transfers for new customers for a specific time, normally 1 year to 1.5 years. For this debt to be beneficial, you should pay it off during the 0% duration.
3. Retirement account
Take out a loan or withdraw early from your retirement account. The problem is that it can result in penalties or throw your retirement account off track. On the other hand, you’re borrowing from yourself, so qualifying for the loan isn’t an issue.
Now you know why a secured debt consolidation loan should be your last choice, you can use this knowledge to make wiser choices in the future. Essentially, debt consolidation can be a great option if you are dealing with creditors. However, you should be careful to ensure you choose the solution that best fits your situation. You also need to know why you got into debt in the first place and change your behavior. This way, you will be able to pay off your new debt and avoid a repeat of the problem in the future.
