Debt Consolidation & Relevant Legal Considerations
Debt consolidation allows a consumer to put together a broad range of smaller debts into a single large debt, which may be more efficient. They will need to pay just a single monthly payment and may have a lower interest rate. However, debt consolidation does not resolve any obligations or provide financial relief. It is merely a restructuring process. If you take this path, you should avoid feeling overconfident about solving your problems. Sometimes consumers accumulate more debt before paying off the consolidated loan, leaving them in a worse position than when they started.
The question of whether debt consolidation can help you may depend on whether you are able to consolidate through a secured loan instead of an unsecured loan. A secured loan is attached to a specific piece of property that you own, which means that the lender can take the property if you fail to pay off the loan. An unsecured loan, by contrast, does not have any attachment to an asset and rests only on a borrower’s assurance that they will repay the loan. You can think of the difference between secured and unsecured loans as the difference between a mortgage and credit card debt.
Consolidation With a Secured Loan
This process might involve refinancing your mortgage, getting a loan against a life insurance policy or retirement fund, or getting a car loan, among other steps. A key advantage of debt consolidation through a secured loan is that you may have lower interest rates, which in turn lead to lower monthly payments. This option may have tax advantages as well. However, due to the nature of a secured loan, you may lose the asset that you are attaching to the loan if you cannot keep up with payments. This asset usually will have considerable value if a lender deems it sufficient to support a large loan.
If you are paying back a consolidated secured loan over a long time, moreover, you should be aware that you may be paying a larger total amount than you would pay on the individual loans. This can be hard to notice because each monthly payment is lower, but the term of a consolidated loan is often longer than the terms of the smaller loans, so interest accumulates for a longer time.
Consolidation With an Unsecured Loan
Many lenders will be reluctant to offer consolidation through an unsecured loan unless you have a strong credit rating. This is rare for someone who is considering debt consolidation. An unsecured loan allows you to consolidate your debts without risking the loss of any assets. However, you may face a higher interest rate than you would have on a secured loan, so it may not reduce your monthly payment as much as you would prefer.
These loans often take the form of low-interest or no-interest introductory rates on credit cards. You should be aware that the introductory rate will only last for a limited time in most cases, so you may encounter a spike in interest if you do not pay off the debt before the period expires. These offers also usually contain significant restrictions, which you will want to understand before using the card.
