- 2 min read
- A debt consolidation loan can be secured or unsecured.
- Secured loans require collateral.
- Unsecured loans usually have high interest rates.
Need a Consolidation Loan or Money for Home Repairs? Read About Your Options.
You may be considering a loan to consolidate credit card debt, or perhaps a loan to repair or remodel your home. This article discusses your loan options, and contains a links to learn more about your loan and grant options.
In general, loans fall into two categories:
A secured loan uses your property as collateral, which is called the security. If you default, the lender claims the security to pay off your loan. Although the interest rate on a secured loan is lower than an unsecured loan, the security is at risk if you fail to make the monthly payments. Typical secured loans include mortgages, vehicle loans, or pawn shop loans.
An unsecured loan is also called a personal loan or signature loan. It requires no collateral. Unsecured loans command higher interest rates than secured loans. Typical unsecured loans include credit cards, student loans, and payday loans.
With an unsecured note, the lender takes much more risk, as they have few ways to recoup their losses in case of default. This results in a higher interest rate. However, some banks and credit unions offer unsecured consolidation and home repair loans, depending on the borrower's credit score. Speak with local lenders to learn what unsecured loans they offer.
In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which usually carries a lower interest rate and may be tax deductible, to pay off high interest rate credit card debt. If you own a home with equity, you may want to consider a cash-out mortgage refinance.
Be aware that shifting unsecured debt to secured debt can create a volatile situation. If there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt relief loan, most mortgages are 30-year loans, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is generally no credit rating impact.
You may qualify for an unsecured consolidation loan to pay off your debts, but if you have no collateral, such as a home, the interest rate would probably approach that of your existing credit cards. Another option is a grant or loan from the federal government. See the Bills.com resource Home Repair Loans and Grants for a list of 10 government loans and grants.
If you are struggling with debt, you are not alone. According to the NY Federal Reserve total household debt as of Quarter Q4 2023 was $17.503 trillion. Student loan debt was $1.601 trillion and credit card debt was $1.129 trillion.
According to data gathered by Urban.org from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.
Collection and delinquency rates vary by state. For example, in Connecticut, 17% have student loan debt. Of those holding student loan debt, 6% are in default. Auto/retail loan delinquency rate is 2%.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.