Secured loans are tied to some sort of collateral — a valuable asset that the lender can take in the event you no longer pay your bills. Common collateral includes your house or car. It’s easier to get a secured loan since there is less risk to the lender. For the same reason, it’s also usually easier to get a larger amount at a lower interest rate. The interest may also be tax-deductible.
Of course, while it’s easier for you to land this kind of loan, you could also lose your assets if you default. You may also be paying down this kind of loan for much longer. Home equity loans are among the most common kind of secured debt-consolidation loans.
In contrast, an unsecured loan isn’t tied to collateral. Because of that, it’s less risky to you — by defaulting, you’re mainly risking credit damage instead of your house, car, or other assets. Unsecured loans also usually take less time to pay down.
However, getting an unsecured loan is tougher, especially if your credit is tarnished. Because the lender takes on more risk with unsecured loans, you’ll probably be offered a higher interest rate and a smaller amount, and there are no tax benefits. Personal loans, credit-card balance transfers, and loans offered solely for the purpose of debt consolidation are among your options here.
Where Do I Get a Debt Consolidation Loan?
If you need a secured loan to consolidate your debt, you’ll likely be limited to a brick-and-mortar lender such as a bank or credit union. If you’re considering an unsecured loan to consolidate your debt, you’ll have more options.
It’s hard to beat the convenience of online lenders, several of whom I reviewed above. You can also apply for a personal loan at most local banks and credit unions — while the lending process can move slowly, you can get more personal service this way.
Finally, if you can roll your debt onto a credit card with a very low introductory rate, this is a viable option, too. However, you’ll need to be disciplined enough to pay it off before your introductory rate expires and leaves you with the (much, much) higher ongoing interest rate.
You may also be wondering about debt-consolidation companies that will make you a loan to pay off your existing debts. It can be very hard to find a company that isn’t actually pushing debt management or settlement plans, both of which I describe below. Above all else, the best debt consolidation companies are transparent about their methods.