The Difference between Secured and Unsecured Debt Consolidation Loans

Debt consolidation simply means that one obtains a single loan to settle another which can either be another single loan or else multiple loans. There can be several different reasons for making such a decision and pursuing a lower interest rate, convenience of paying a single loan or else because of the need to secure a fixed interest rate could be several of them. In any event, knowing that there are two different types of debt consolidation loans available in the market by the names of ‘secured’ and ‘unsecured’ should be helpful along with a basic understanding of the difference between the two.

Secured debt consolidation loans:

The term secured means that the borrower provides the lender a security by means of an asset belonging to the borrower in order to obtain the loan for debt consolidation. In most such instances, the credit worthiness of the borrower is questionable to the lender. As such, the security provided by the borrower will give the right to the lender to seize the given asset in instances where the borrower defaults the payments according to the loan agreement. Once provided as the security, the asset in question cannot be sold or transferred by the borrower without the permission from the lender. If a default of loan payment takes place, the lender can legally acquire the asset and sell it in order to obtain the defaulted payment as well as the entire loan amount with interest.

Unsecured debt consolidation loans:

As the name suggest, this type of loan differs from the former by not having a security such as a fixed asset. Such loans are given purely on the basis of the credit worthiness of an individual. One example for this type of loan is the consolidated loans given by certain lenders to its clients for settling another credit card, or for the purpose of making a purchase. In this method, the lender does not have the right to seize any assets as it has not been declared or securitized by the borrower. As such, the lenders have to make use of prescribed methods of collecting the debt and report the defaulted borrower to designated agencies which may downgrade the credit worthiness of the borrower.

Making the decision:

The decision to obtain a secured or unsecured debt consolidation loan is purely a matter of need and the purpose of its take. For example, if one plans to build his or her own credit, it is best to select an unsecured loan as any defaults may not warrant the borrower to lose any of his or her assets. However, in instances where one wants to purchase a car or a house, one may be given the option of a secured loan which is reasonable enough from the lenders point of view.