In the myriad of options available to deal with debt, debt consolidation loans are among the most popular. Also known as debt elimination loans, these financial products are utilized by many to relieve the stress and strain of excessive debt.
Debt consolidation loans typically come in one of two options: unsecured and secured loans. Both versions are loans taken out in which the proceeds borrowed are used to pay off existing debt. Usually the lenders of these types of products are private lenders, such as banks and savings and loans institutions. The particular terms of the loans may vary, depending on the lender, borrower, and amount being requested, but typically these types of loans are utilized in part because they carry a lower interest rate than most consumer debt and may have a longer repayment term.
The unsecured type of debt consolidation loan is not secured by any property or collateral, hence the “unsecured” status. These loans are taken out in the same manner as their secured counterparts, but may have more stringent qualification requirements. For example, with almost any unsecured loan, you must verify income and employment, as well as having exemplary credit to ensure proper payment. If available to you, an unsecured debt consolidation loan is ideal to wipe out high interest rates and finance charges of current lenders.
On the other hand, secured debt consolidation loans have collateral to guarantee the repayment terms. While this is usually done through a home equity loan, other types of property may also be encumbered as a form of collateral. This is a dangerous practice, as you should never eliminate unsecured debt by creating secured debt.
If you do not pay an unsecured creditor, they may sue you and possibly obtain a judgment. Although there is a good chance they may never pursue a lawsuit, if they chose to sue you, they would most likely win. Only after they won would they be able to possibly attach any property you own or money in your possession, and, depending on what state you are in, there may be very little they can actually seize. However, with secured debt, they do not have to sue you; as a lien holder, they have an inherent right to seize the collateral if the loan is not being repaid as agreed. Therefore, you open yourself and your property up to a world of trouble when you utilize secured loans to pay unsecured debt. Likewise you place unnecessary risk on your property by encumbering it.
This leads to a typical problem when people utilize debt consolidation loans but do not have the self-control to follow through with the process. For example, when a loan is taken out and the previous debt repaid, a serious problem arises when those credit lines are charged up again. Unless you close those accounts, there may be serious temptation to utilize the credit lines you have available and invariably double the amount of debt you owe, with the debt consolidation loan and then the newly created debt.
This is especially a concern if you have utilized a secured debt consolidation loan to repay the old debt. In this scenario, creating more debt places you home or other property at risk. Therefore, it is advisable that you eliminate unnecessary credit lines if you do not have the self-control to not use them. It may be advisable to close those accounts anyway, as too many open accounts may reflect poorly on your credit score. When utilizing a debt consolidation loan, you will actually be helping your credit score tremendously, assuming you carry through with the terms as agreed upon.