Should you Take a Loan Out to Pay Off Credit Cards?
If you are wanting to have better control of your finances or are tinkering with the idea of bankruptcy, you have probably noticed the advertisements for debt consolidation. However, debt consolidation may not be the right option for everyone. Learn more about using debt consolidation to pay off credit cards.
If you have not heard of debt consolidation, it is when someone gets a single loan in order to pay off several smaller loans. This leaves the borrower with one single payment each month rather than multiple payments. The idea is that having one payment is easier to manage.
Unsecured vs. Secured Loans
Unsecured loans do not require any collateral to obtain and only rely on your promise to pay. This means that there is no property tied to the loan that may be taken if you default on the loan. Credit cards are a type of unsecured loan. These loans typically carry a higher interest rate because they are riskier for the lender.
A secured loan, like a car loan or mortgage, is obtained by securing the loan using certain property for repayment. For example, if you obtain a mortgage, your home is the security and can be foreclosed upon and taken by the bank if you fall behind on the loan.
Secured Loan Debt Consolidation
There are multiple options available to consolidate debt through secure loans. You can take out another mortgage, refinance your home, get at car loan, or use your 401K as collateral. While these loans may be an option, there are certain pros and cons of consolidating through a secured loan.
Pros
● Lower interest rates
● Lower monthly payments due to lower interest rates
● Payments that may be tax deductible
● Easier to obtain because they are less risky for the lender
Cons
● The property you pledge as collateral could be at risk
● Certain assets, such as retirement funds, may not be available when you need them if the loan is not paid back yet.
● The term may be longer, which could result in more interest paid over time.
Unsecured Loan Debt Consolidation
Unsecured debt consolidation used to be quite common but are not as readily available anymore. In most cases, to get an unsecured loan, you will have to have good credit. This is why many people opt to get a credit card with a low-interest rate or introductory rate as a substitute for a loan.
Pros
● No property is at risk because none is needed to secure the loan.
● The interest rate may be higher than a secured loan, but it may still be lower than the interest rates on your credit cards.
Cons
● This type of loan is often hard to get if you do not have good credit.
● Interest rates are typically higher than secured loans, which may result in a higher monthly payment.
● Using a balance transfer is often tricky with fees involved and rules that can decrease the benefits.
Get the Help You Need to Pay Off Credit Cards
If you are considering debt consolidation or other types of financial assistance, the attorneys at Cornwell Law Firm may be able to help. We have years of experience dedicated to helping people get back on their feet through debt consolidation, bankruptcy, and other options. Contact us today to schedule a free consultation.
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