According to some recent survey statistics, an average American has USD 9,000 in debt and most of it is unsecured, which translates into high interest rate debt. Secured debt consolidation will permit you to opt for a low-interest rate loan to pay off your other debts. Many American households are taking advantage of this option to get out of the debt trap.
The prevailing economic situation has made the condition worse with pay cuts and job loss. In such conditions, it does not make financial sense to hold on to loans, for which you are paying high interest rates.
How does consolidation work? It's fairly easy to understand. Suppose you have a credit card debt, personal loan, and a student loan amounting to USD 20,000. You are paying three different installments for these loans. Being unsecured, the interest rates on these loans are high. Opting for a secured debt consolidation loan of USD 20,000, with a lesser interest rate, will permit you to pay off all three of your existing loans. This will leave you with only one monthly installment to worry about.
When people walk into the office of a credit counseling agency, with financial woes, the first piece of advice they get is to eliminate unsecured debt. This includes credit card debt, personal loan, payday loans, etc. that have high interest rates. With these types of debt, untimely payments will incur heavy penalties, resulting in a bad credit rating.
Agencies will recommend a secured debt consolidation loan for most people struggling to pay two or more installments. Lending organizations don't generally give out unsecured loans and even if they do, you end up paying more than you already owe. Secured debt consolidation loans are given against a collateral, like property, or jewelry. Therefore, they have low interest rates.
The collateral grants an assurance to the lender that the loan would be repaid. This assurance plays a big part in securing these loans. You may hope to get competitive interest rates.
Consolidation is the best way to be relieved of debt, as you end up with a lower installment amount, than the combined installments of your previous loans. For a better understanding of how consolidation works, here's another example. Suppose you pay USD 1,000 for your credit card debt, USD 1,000 for your personal loan, and USD 1,000 for your student loan. For a combined consolidated loan amount of USD 20,000, you can get a monthly installment amounting to only USD 2,000. So you end up paying USD 1,000 less, as installment for the same amount of loan.
When you evaluate the pros and cons of debt consolidation, it is advisable that you opt for a secured loan option, rather than an unsecured one. Consolidating your debts is one of the easiest ways to get out of the debt trap.