Have you heard about debt consolidation loan? It is one such option for debt relief. It works by consolidating all your small debt into one like credit card debt, medical bills, personal loan etc. allowing you to make only one payment per month can seem very attractive option particularly when you get a loan at lower interest rate. Under such circumstances, one question that everyone gets is whether I will be able to get lower interest rate loan?

In reality, the rate of interest charged on credit will lot depend on the type of credit, unsecured or secured? Secured debt is one that lenders require collateral to lend you money. The collateral can be any valuable thing. The amount of money that the lender lends will depend on the value of the collateral you have secured. With secured loan, it you were to default on debt, and then lender will liquidate underlying collateral to recover his money back. As the lender has the guarantee for the amount he lends in the form of collateral, the risk of lending is little therefore this advantage is transfer to borrower in the form of lower interest rate. For example, mortgage.

On the other hand, with unsecured debt, the lender has to risk for the amount he lends to borrower as there is no guarantee for the amount you borrow from lender. Due to associated risk, the rate of interest charged on the unsecured debt will be more. For example, credit card debt.

In these aspects, there are many lines of credit through which debt can be consolidated. If you have home, then it can be used to consolidate your debt by taking home equity loan or refinancing to cash out to pay off other debts. The other way includes unsecured personal which has become very expensive and difficult to achieve in current market conditions.

In such scenario, if you have equity on your home then it can make lot of sense to consolidate other forms of debt. for example: if you have $20,000 on unsecured debt like credit card debt, personal loans that carries 20 percent interest then it will be wise to roll the debt with mortgage that carries 5 to 6 percent rate of interest. With this move you stop your debt to incur at faster pace.

But as with any other issues it also has downside. For this reason many experts go against using mortgage as a debt consolidation option. Although you simplify your finance with mortgage debt consolidation, it can lead to many other serious troubles if you don’t manage to handle payments on time in future.

Home equity is defined as the difference between the property value and the mortgage loan secured on it. For example, if the value of property is $250,000 and the loan secured on the property is $100,000, then you would have an available equity on your property of $150,000. Home equity loan is that taken against the difference between these values. The common reasons for taking loan against home equity include, debt consolidation, buying another home or for home improvements.

Many people often ask me about taking loan against home equity loan is right decision or not. So it thought of discussing the advantageous and disadvantageous of it for you to take right decision.

Advantageous of home equity loans:

A provision of collateral means reduced risk to lenders therefore the lending cost will be reduced. Keeping your home as collateral you will get loan with lower interest rates compared to one taking as an unsecured loan. There are many lenders who will lend secured home loans for several thousand dollars that allows you to get competitive interest rates on home loan. Home equity loan allows you to borrow large sum of money against your property value which allows you to clear all your debt existing.

With home equity loans you can manage to reduce monthly repayments as you can clear all unpaid, highly expensive debt like credit card debt, unsecured personal loans or any repossession deficiencies. Paying of the debt that is highly expensive with low cost loans will reduce the amount of debt incurring there by reduce the monthly payment amount.

As the borrower is able to pay single monthly payment on home equity loan, he gets rid of making small payments to different multiple lenders. This allows you to simplify your personal finance.

The interest charged on home equity loan is tax deductible which may not be possible with unsecured debt.

Disadvantageous of home equity loans:

The main disadvantage of borrowing against the home equity is you risk losing home when you default on payments that is failing to keep up with monthly repayments may result in repossession of the asset and foreclose. Which lead you to loss your property. Due to risk it carries, it is not advisable for you to borrow secured loans for repaying unsecured debts.

Turing an unsecured debt to secured debt gives the borrower a way to get back their money back.

There are many other ways through which unsecured debt can be handled, debt settlement programs is one among those, which can help you in getting rid of debt settlement. If there are ways to get you out of unsecured debt then why do you risk you home? This question must be answered while you are thinking to avail secured home equity loan.