Unsecured or Secured Debt Consolidation

By: Dee Power
With the state of today's economy and dramatic increase in the cost of almost all goods and services, many individuals are now living from paycheck to paycheck. This is a frightening situation, to say the least.

If you can afford to make payments and aren't completely underwater, one solution to reducing debt, is taking out a debt consolidation loan. These loans can be secured or unsecured and will usually be dependent on your credit score and whether or not you have anything of value, which can be used for collateral.

Unsecured loans are just that. They are not secured by any type of collateral. They are typically given to those with higher credit ratings. Secured loans are "insured" by item or items of value, such as a piece of property, automobile or expensive piece of jewelry.

In the event that the loan defaults the collateral is used to pay off the balance. Secured loans may be the only option for those individuals who are considered a higher risk. These are individuals who may have gotten behind on their payments, at some point in the past.

A home equity mortgage or refinancing can be used ad a debt consolidation loan. You must have equity built up in your home and a solid credit rating as well as a verifiable income from a steady job. These days if you don't meet all three criteria: equity, good credit rating, and a job, the odds are you won't be approved for a refinancing.

A home equity line of credit could also be used for a loan consolidation. However, the interest rates on these types of loans are higher than a refinancing. If you default on the line of credit the loan company can start foreclosure proceedings even if you've made your first mortgage payments on time.

Debt consolidation loans are an excellent choice for those who are faced with multiple debts. The proceeds of the loan are used to pay off each creditor. A single payment is then made each month to the debt consolidation company, who issued the loan.

Many times the single payment is less than the total amount that was being paid to creditors. This is especially true if the debt consolidation loan was obtained to pay off high interest credit cards. Most debt consolidation loans are spread over a longer time period for repayment which decreases the monthly payment as well.

Debt consolidation doesn't affect your credit rating negatively because you're paying off what you owe in its entirety. The fact the accounts have been paid in full will help improve your rating if you make all other payments on time.

The danger is if the credit card accounts aren't closed after they've been paid off. If they're used and the balances start building up again you'll be in a worse position than before.

About the Author:
Dee Power is the author of several nonfiction books. Find out more about debt consolidation and Credit cards Read Dee's finance blog