subject: Is a Secured Bank Loan the Best Option for Consolidating Debt? [print this page] In these tough economic times, one option that people are looking at is consolidating their debt through a secured bank loan. It sounds like a good ideamake a single payment that is less than all your payments combinedbut it does come with certain risks. Taking out a secured bank loan is especially attractive when borrowing rates are low and credit card debt is high.
But is this always a good idea?
First, let's define a secured loan. A secured loan is simply one in which you borrow money against collateral, such as a house or car. Now let's look at the benefits of debt consolidation through a secured loan.
Lower monthly payments. This typically is the biggest factor when people decide to consolidate with a secured loan. While many people are aware that they may be paying more over the long term, that smaller monthly payment can be quite attractive to someone who is in a tough financial situation.
Paying off credit cards. When consolidating loans, you are, in effect, paying off those high credit card debtsand helping your credit score. If you do consolidate, it's imperative that you stop using your credit card, and if you do use it, to pay off the full balance each month. If you cannot afford to pay cash, you cannot afford it. This type of discipline is vital if you want to keep your monthly spending down.
Lower Interest rate. When you consolidate, you pay off those high interest credit card debts. Secured loans are always several points lower than any credit card interest, and are also lower than unsecured loans.
Payments spread out over several years. This can be a positive or a negative, depending upon your situation. Most people who are consolidating, however, feel comfortable spreading their debt over many years just to get that monthly payment down.
Can borrow much higher amounts. Because you are putting up collateral in case of default, banks are much more likely to loan higher amounts for secured loans. If you are in serious debt, a secured loan may be your only option.
While there are many positives, this type of loan does have one big negative:
Putting your home or car at risk. If you have a secured loan and cannot pay it back, you may be putting your home at risk of repossession. For this reason, many people are nervous about secured loans and, if possible, will opt for an unsecured loans. The risk of losing a home is a huge negative that, for some, will outweigh all the positives of obtaining a secured loans.
Before making any decisions, weigh your options. Figure out how much debt you have, the realistic payment you can handle, and whether you can take the pressure of the thought of losing your home or car if you fail to pay the loan back.
Is a Secured Bank Loan the Best Option for Consolidating Debt?
