Debt consolidation The first plan is called debt consolidation. This usually involves taking either a secured or unsecured credit line to pay off all your debts. Usually, it's done to secure a lower interest rate, secure a fixed rate, or to take advantage of the convenience of making only one payment. It seems quite easy, but there are pitfalls to this plan. You need to meet rigorous qualifications: You need to have excellent credit for you to secure the low rate. You need to have a very good income so the lender is assured that you will be able to make the payments. If it’s a secured line, you need to have enough equity in your home to qualify. According to statistics, 70% of consumers who use a credit line to pay off their debt will be in the same or even higher amount of debt in two years or so. The biggest pitfall lies in a secured line because you are taking unsecured debt such as credit cards and now converting them into secured debt, which means that if you default on this line the lender can foreclose and take your home.
Entails taking out one loan to pay off other debts. It can be a secured loan or unsecured loan. Secured loan basically means it’s attached to a collateral usually a home or other asset. Advantages: Usually has a lower interest rate because a bank has a real asset secured to it. So even if you default, the bank has something of value to protect itself. One monthly payment instead of paying several payments Disadvantages: You are taking credit cards that are unsecured and turning them into secure debt. In effect, you have strengthened the bank's position on this type of debt and the payment can possibly force you to be overextended, because clients usually rack up their credit card bills in approximately two years' time. So, in effect, it only solves the issue skin deep. The lender can have you do a forced sale to sell your home to repay debt. Need to have a good and steady income. Need to have excellent credit to qualify usually over 700 scores. Need to have a good amount of equity in the property (usually 25 to 30%).
Financing fees associated with this type of loan are usually pretty costly. But if you have excellent credit you can go to your local bank and probably get a no cost loan. Unsecured debt consolidation does not involve any collateral. o Need good credit. o Need good income. o Interest rate is usually much higher.
Lenders look at both secured and unsecured loan as a sign of being overextended.
In recent times, because of the mortgage crisis, banks are being much more conservative on who will qualify for this type of loan. Qualification standards have become extremely difficult—very few, if any, of these loans are actually approved.