Secured Loan for Debt Consolidation
This article explains what secured loans for debt consolidation are, how they work, and how you can qualify for one. It also tackles certain aspects of this loan type, like its rates, its advantages, and disadvantages. But more importantly, it tries to answer whether taking out this loan makes sense for your financial situation or if it’s best to seek alternatives.
Listed below are the top lenders of secured debt consolidation loans that you can consider:
- Rates
- Credit Score
- Max Amount
- Accepted Collateral
Upgrade
- 6.94% to 35.97%
- 580
- $50,000
- Car
Avant
- 9.95% to 35.99%
- 580
- $35,000
- Car
LightStream
- 3.99% to 19.99%
- 660
- $100,000
- Car / Motorcycle
- Rates
- Credit Score
- Max Amount
- Accepted Collateral
One Main Financial
- Not specified
- Not specified
- $25,000
- Car / Truck / Boat / Motorcycle
Oportun
- Not specified
- Not specified
- $10,000
- Car
Wells Fargo
- Not specified
- Not specified
- $250,000
- Savings account / CD or Certificate of Deposit / Home
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
How Secured Loan for Debt Consolidation Works?
It might be more difficult to obtain a loan for consolidating debt if you applied without collateral. This is because lenders will have no form of security if you fail to make payments, hence the term “unsecured loan.” That’s why most lenders would often set the credit requirements high for this loan type because they want to ensure that you can pay back what you owe.
On the other hand, with secured loans, you pledge an asset that lenders can seize when you can’t repay your debt anymore and default.
Using these assets as collateral gives the lender the confidence to let you borrow money because the guaranteed asset is there to ensure that they will get something back. And it’s also because of this security that the requirements for this loan type are not as stringent.
When you use a debt consolidation loan, the funds you’ll get from your lender will be used to pay off all that you owe as you convert everything into a single payment.
The asset can be your car, your home, or even your savings.
Requirements to Qualify
Essentially, to qualify for a secured personal loan, lenders would need to verify your identity, income, and your location or address. For valid identity proof, you can submit a copy of your driver’s license, passport, Social Security Number (SSN), or individual taxpayer identification number (ITIN).
With income proof, you can show your pay stubs, bank statements, and past tax returns. And as proof of address, lenders typically accept utility bills, a lease agreement, voter registration card, or home insurance.
And, of course, you need to present collateral to obtain the secured loan. As you can see from the table we made above, the asset you can use as collateral varies between lenders. Some may accept only your car, while some may accept your home or your savings.
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Factors to Take Into Consideration
No matter how attractive a secured loan is for debt consolidation, it still isn’t an all-weather solution. For instance, it may be better for you to get an unsecured loan if you have good credit and can get low rates because, in this way, you don’t have to risk anything you own.
Here are two other instances when consolidating debt with a secured loan is a good idea:
If you have bad credit but have some valuable assets
Applying for a secured loan usually has a higher chance of approval because of the pledged asset. This means that even if you don’t have the most stellar-looking credit score, you may still be able to snag a personal loan as long as you have an asset that your lender is willing to accept as collateral.
When you pay higher rates from all your credit sources
While you may be able to get a secured loan with a poor credit score, you may still end up paying a higher rate than what you currently pay overall for all your debt sources. Because as you continue to ramp up your credit use, your credit utilization ratio also goes up, and this reflects poorly in your credit score.
As a result, lenders factor this in deciding what rates you’ll ultimately receive regardless of your collateral. It would only make sense if what you pay overall is clearly higher than what you’d likely pay for the secured loan.
Pros and Cons
Besides knowing the ideal circumstances when a secured loan for debt consolidation will benefit you, you should also know what’s good and bad about this loan type. Here are a summary of its pros and cons:
| Pros | Cons |
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Saves you money: As we touched on earlier, secured loans mean lower rates. The collateral you provide is the guarantee that convinces the lender to reduce the burden on interest payments. With the higher interest rates on an unsecured loan, you may not be able to save as much money as you can. |
Puts your asset at risk: The number one disadvantage of applying for a loan with collateral is that you put your asset at risk. You can't deny that unexpected events could happen and, therefore, could cause you to default on your financial obligation. In that event, of course, your asset will be seized by the lender. |
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Frees up your income: Sometimes, by lowering rates, you'd also end up getting a lower monthly payment. This helps free up some of your income so that you can allocate your funds to other important financial considerations. |
Extends repayment duration: Despite eliminating multiple debts and lowering the rates and monthly payments, debt consolidation usually means an extension of your repayment schedule. For instance, if one of the loans you are consolidating matures in a year, it will be absorbed in the new loan under a fixed monthly payment that lapses perhaps after two years or so. And this is because your debt is not eliminated; it is merely readjusted to more bearable and manageable terms. |
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Organizes your finances: With a debt consolidation loan, you'd be able to combine all your various debt payments into a single one. This means no more multiple due dates for you to worry about. |
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Tax deductions: And one last advantage is the tax deductions on certain kinds of secured personal loans that you can use to deduct the interest you pay each year. |
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Get higher amounts: A secured loan can offer you high amounts because it is often based on the value of the asset you will use as collateral. Suppose that you applied for a home equity loan and the equity you built on a $300,000 house is more than 60%. In that case, you might be eligible for $120,000, provided that you have an excellent credit score.v |
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Average Debt Consolidation Secured Loan Rates
At this point, you already know that several factors affect loan rates and most of which revolve heavily around your credit despite what you brought in as collateral. As we mentioned, your collateral only improves the chances of approval, but credit factors are still the biggest influencer.
Lenders’ rates also differ, but you’ll likely get on average more than 36% APR if you have poor credit. However, if you possess an excellent credit score, you may find lenders that offer the lowest rates in the market. One example is LightStream, with an APR of only 3.99%
The better credit score and history you have, the more favorable rates you can get.
Secured vs. Unsecured Loan for Debt Consolidation
Ultimately, when deciding between a secured loan and an unsecured loan for debt consolidation, you must consider your situation and what options are available to you. You also need to factor in the amount you need and the comfortable repayment terms.
If you need more than $100,000 and you have significant equity in your home, you might want to apply for a secured loan type to consolidate your debt. On the other hand, if you can obtain an unsecured loan with your stellar credit score and history, that might be a better option considering that you’ll have to put your asset at risk with a secured loan.
So, again, it all boils down to what is more appropriate to your circumstance.
Alternatives to Secured Loans for Debt Consolidation
If you’ve determined that a secured personal loan for debt consolidation isn’t the way to go, do know that there are alternative solutions for managing your debt.
An example is a balance transfer credit card. This is also a form of debt consolidation but consolidates all credit card debts into a new credit card, typically with a lower interest rate.
You can also opt for a debt settlement if all the payments start to become unbearable. Debt settlement is leaning towards debt forgiveness, although not entirely. However, subscribing to this option would have negative consequences on your credit score.
Frequently Asked Questions (FAQ)
If you intend to apply for credit in the future, it might be a better idea to seek a debt consolidation loan instead of a debt settlement. This is because a debt settlement can lower your credit score by up to 100 points, and it may last several years.
It is worth it if your objective is to make multiple loans and other debt payments more manageable. It is also worth it if you intend on saving money from high-interest rates and high monthly payments.
Yes, through a debt consolidation loan. However, it does not actually clear you off all your debt but rather readjusts loan terms to something more workable for you.
Yes, you may use the funds you receive from the debt consolidation loan to pay off your car loan. You can also include medical bills, credit card bills, payday loans, unsecured loans, and other credit types.
If a secured loan isn’t paid, your credit score and history will be tarnished, and the lender will likely seize the asset you put up as collateral.
