Types And Quantum Of Risks Of Secured Debt Consolidation And Its Legalities

It is important for you know that when you want to consolidate your debts with a secured loan how far you are risking your assets as collateral. This knowledge will help you to make an educated decision whether or not you should go ahead with the process.

As you may already know that the law allows you to consolidate your multiple debts in order to help you in the debt repayment process with a secured or an unsecured loan like a personal loan. This process of debt relief will allow you to:

  • Reduce the number of your debts to one but you pay the actual amount that you owe in the form of your multiple loans
  • Reduce the amount of monthly payments as the rate of interest of these loans is usually low and the loan tenure is high
  • Reduce you work of maintaining the track of multiple bills and chances of missing a payment.

With all these benefits inherent in a debt consolidation loan it often seems to be the most viable option to many borrowers struggling with their debt repayment. It is also a very useful option when borrowers find that other loans are not available because of low credit.

Out of the two options available for debt consolidation, most people think opting for a secured loan is better than an unsecured loan because it is easier to avail due to the attachment of collateral. However, a closer look will reveal the risks inherent in it.

Know the types

In general, debt consolidation puts the consumers as risk mainly due to several factors such as:

  • It costs more and
  • It lengthens the repayment.

The risk is more in a secured loan for the consumers and less for the banks and other lenders as your property which can be your home or car is put in the lie of fire. You can lose the asset if you fail to make the payment as the banks and lenders have all the right according to law to seize it at the slightest of opportunity.

However, before, you shun this considering it to be a bad idea you must have more in-depth knowledge about it starting with knowing the types of secured debt consolidation loans offered by banks and other sources like nationaldebtreliefprograms.com and the collateral that may be considered to grant it to you.

  • Real estate: You can use you homes or any other real estate and pledge it as collateral for obtaining the consolidation loan. However, this falls under the high risk secured loan category as a home is often considered as the most important financial asset for any consumer.
  • Home equity loans: You can also use this to obtain a debt consolidation loan however it is not often recommended. In this case the equity in your home is calculated. This is the value of the home you own already by paying the portion of your mortgage. This amount is provided to you as cash. This can be a lump sum for a traditional home equity loan but for a home equity line of credit it will be a revolving credit account. This type of loans typically allows you to cut down the rate of interest to half but you will also lengthen the repayment at the same time increasing the chances of default and losing your home.
  • Cash out refinancing: This is a much similar option as the home equity loan however there are a few key differences. You can keep your original mortgage in a home equity loan to take out a second loan but this is not possible in cash out refinancing. In this case you will need to replace the first mortgage with a second one which is usually larger in amount than the first. The portion of the equity that you want to liquidate to cash will be added to the total amount of outstanding mortgage balance with the new loan raising the debt amount automatically.
  • Cash out financing: You can follow this approach with any bank or credit union but it will require you to have at least a decent if not good credit. You can apply this to your vehicles as well if you have equity in your car. This is considered to be a risky financial practice as it is up to the banks and other lenders to determine the rate of interest to be charged as per your credit score. However, the problem is that you are here in fact creating a larger loan account for yourself. This can put you deeper in a financial hole.
  • Title loans: These are more like a payday loan if you consider your car for refinancing. Title loans usually do not require any credit check because it as it is presents the borrowers with high APRs and interest rates. Moreover, just like a payday loan you will often find yourself in a vicious cycle quickly. The only way in which you can get rid of one title loan is by rolling it into another one. However, the most significant difference of a title loan and a payday loan is that your car is at stake as collateral.

There are a few interesting and surprising facts that also encourages consumers to take such specific type of secured loans.

  • According to the recent research conducted by Vanderbilt it is seen that far less than 10% of property pledged as collateral in such programs are repossessed.
  • Another significant fact is that this number is also far less than the prediction of several experts.

However, these facts do not make these to be a good idea. This is because you may end up paying thousands of dollars more than the amount of your original loan as per the law.

Ideally, you should use these loans only if you have urgent and unexpected need of money. It is best to consider all your options first to be on the safe side. You will be better off consulting with a credit counselor to know about your financial situation, hardship program arrangements required and safer lending options.