There is a lot of talk these days of secured and unsecured debt, but do you know the difference? There are also a lot of ads for secured loans and unsecured loans. There are advantages and disadvantages to both and some things that you should avoid when it comes to secured loans.
Let’s start with secured loans. These are loans that are secured with collateral. Examples of secured loans are mortgages and car loans. Property and pretty much any asset that has value can be used as collateral. The most important thing you have to realize about secured loans is that if you default, the lender will eventually take possession of the property. Not making house or car payments can lead to repossession or foreclosure.
An unsecured loan, sometimes referred to as a signature loan is a loan that is gotten just by you signing an agreement to repay the money. Credit cards of any type and personal loans are two types of loans that are unsecured debts. You have to be credit worthy to get both types of credit, but the restrictions are less strict for unsecured debt because the amount being leant is less and the interest rates are generally higher with unsecured debt. The lender has less recourse, if they do not have your collateral.
Mortgages interest rates are at an all time low at the current time. And the higher your credit score is the lower your interest rate is going to be. If you have equity in your home, you may be able to take a loan out with that equity allowing you to finance and education, credit card debt and any number of other things. The interest rate on a home equity line of credit will not generally be as low as your first mortgage, but they will be much lower than what most people are paying on their credit cards these day.
Using the equity in your home used to a popular way of paying off credit card debt, but there are a few things you must know before ever considering this as an option. You are going to get a good interest rate and the interest will be tax deductible. As long as you can be disciplined, this is not a bad option. But in this economy, using your house to pay off credit card debt would probably not be a wise move even if you are disciplined enough to make the payments. If you should become unemployed and cannot make your payments, this could put your house in jeopardy. If you have credit card debt and you cannot make the payments, you can be harassed and sued, but the credit card companies cannot take your home.
Unsecured personal loans are a bad bet. They generally come with a high interest rate. And any type of loan to pay off debt is not in your best interest. Debt should be paid off by decreasing your expenses and increasing your income. If you are still struggling, consult a nonprofit credit counseling organization and inquire about a debt management plan. They can help you get your debt under control.