There are two types of debt consolidation loans: secured and unsecured. Let’s look at the pros and cons of each.
When you take out a secured loan, you put something of value as collateral. For example, if your grandmother left you a single gold bar worth $6,000, you could use that bar as collateral. Typically, banks lend money based on a loan-to-value (LTV) ratio. If the lender you work with uses an LTV of 80%, that means the maximum they will lend against collateral worth $6,000 is $4,800 ($6,000 x 0.80 = 4,800 $).
You can, however, use anything of value as collateral. Maybe you own land, valuable artwork, or a classic car that you’ve spent years restoring. Once the collateral has been appraised to determine its value, the lender will issue the loan based on the LTV.
- A secured loan is a good way for someone who doesn’t have very good credit to qualify for a loan.
- The fact that there is collateral on the line can be all the inspiration you need to make sure the loan is paid off on time each month.
- The interest rate on secured debt is usually lower than the rate for an unsecured loan.
- If you fail to make payments in full and on time, the lender has the legal right to take possession of the collateral, sell it and recoup its losses. This helps explain why lenders tend to charge a lower APR on secured loans. They know they will receive payment either from you or by selling the asset.
- Whether you’re working with an online lender, bank, or credit union, make sure you find out if they offer secured loans.
The most common type of consolidation loan is unsecured debt. An unsecured loan is secured by your signature and your promise to repay the loan in full. Approval is based on your credit score and how you’ve managed debt in the past.
- There is no risk of losing collateral due to missed payments.
- It’s a simpler process because you don’t have to request a warranty valuation.
- You will likely be quoted a slightly higher APR than you would be quoted for a secured loan.