Now that you’ve concluded borrowing money is your best bet to free you from the ball and chain that is your debt, you’ll likely need to determine what type of loan would serve you best. Here’s what you need to know about secured vs. unsecured credit card consolidation loans.
What Is a Secured Loan ?
This type of loan is linked to collateral — an asset such as a home or vehicle. Should you default, your lender can seize that item to satisfy the debt.
An unsecured loan, meanwhile, is backed only by your credit history and your promise to pay.
Which Loan is Best for You?
You can usually get a secured loan easier because, well, your property is on the line. If your credit is poor or you’re trying to rebuild it, lenders will be more apt to consider you for a secured loan.
Depending on the value of your collateral, taking out a secured loan also usually means a lower interest rate and higher borrowing limits. If you use your house to gain financing, for instance, the property’s value is a factor in deciding whether you’re qualified to borrow, how much you can borrow and the interest rate you’ll pay for borrowing it.
If you have a debt-to-income ratio of less than 50% and good or excellent credit — at least a 690 on the FICO scale — you have a good chance of qualifying for an unsecured loan. Your eligibility may also be determined by alternative info such as your education and where you live. Rates for unsecured loans usually range from 6% to 36%, with the lowest rates going to the most qualified consumers.
Where to Get a Loan
Secured loans are available from banks, credit unions, and online lenders, although they’re more common from the first two. Those same lenders generally also offer unsecured loans, although not all banks do.
You may have a better shot of getting one — and perhaps with better rates — at a bank if you have a relationship with one. The way credit unions are structured prioritizes members, so joining one and trying to borrow there first may also work. Online lenders offer convenience and often relatively low rates — though usually higher than brick and mortar institutions.
Consider pre-qualifying for an unsecured loan to see what rates you can pull.
How to Use Secured and Unsecured Loans
You can basically use funds from either type of loan however you want. Common uses include credit card debt consolidation and home improvement projects. Sometimes, though, what you use the loan for can serve as your collateral on a secured loan. For instance, the vehicle can secure the loan for your new motorhome.
Paying Off a Secured Loan vs. an Unsecured One
If you’re having problems paying off loans, you may want to prioritize the secured loan to avoid risk to your valuables. Repaying a secured loan is typically done in fixed monthly installments. Some such loans carry variable rates, meaning monthly payment totals can vary according to changes in prevailing interest rates.
Unsecured loans are also usually repaid in fixed monthly installments. Falling behind on an unsecured loan, with its attendant higher rates, can put you further in debt and will affect your credit score. If your debt goes into collections, you could be sued and have your wages garnished.
Now that you have a primer on unsecured vs. secured consolidation loans, whatever decision you make, you can do so with confidence. The important thing is to make a move and get yourself back on a path of financial freedom.