Think Twice Before Getting a Secured Debt Consolidation Loan
One of the benefits to owning a home is the option of taking equity out of it as it appreciates, and in this tough economy, many people have considered using their home equity to obtain a secured debt consolidation loan; but is it really worth it? Or are they just throwing good money after bad?
Secured and Unsecured Debt
A loan that is secured is simply one that has collateral backing it up in case of non-payment. For smaller loans, this can mean a car or wedding ring, but for large sums, it usually means using the home as the collateral.
A consolidation loan secured by the home takes all the bad debt and combines it into one lump sum with a single interest rate and monthly payment. On the surface, this process can be beneficial; get the credit card payments organized and usually have a single, lower monthly payment.
If the borrower stays on the payment schedule, has no more financial emergencies, and maintains steady employment, consolidating debts will work very well and their credit will steadily be repaired. However, taking unsecured credit card debt and securing it with the family home carries a high risk with it.
What Happens if the Loan Defaults?
If the unthinkable happens, and the borrower can not make the monthly payment, all of the unsecured bad debt is now tied to the house, giving lenders power to issue a lien on the property. In extreme circumstances, the home will be taken and auctioned to repay the debt.
So what is the solution to getting out from under mounting debt?
First, start communicating with a debt management agency. These companies negotiate and if possible, settle debts for pennies on the dollar. Credit repair plans typically include an evaluation of the credit report, stopping harassment from collections agencies, and following through on paid debts to have them removed from the credit report.
Before getting a secured debt consolidation loan, people struggling with unsecured credit card bills should thoroughly consider the risks involved.
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