Debt Consolidation: Do You Want to Secure Your Unsecured Debt?
One of the biggest decisions many Americans face is how to deal with debt consolidation. And one of the ways quite a few people get out of debt is through a second mortgage debt consolidation. But is this really getting out of debt? And will it truly help you in the long run?
Secured debt v. unsecured debt
One of the first things to understand when taking care of debt consolidation is the difference between secured debt and unsecured debt. This will play a big role in whether or not using a home equity loan for debt consolidation is right for you.
Secured debt is that which is backed up by something. There is collateral on the loan. This means that you offer something up to assure the lender that the cash you borrow will be repaid. In the case of a car title loan, you provide the title of your car. If you fail to repay your loan, then the car is taken from you, and the lender sells it to help repay the debt. The same is true of a second mortgage (or a first home mortgage loan for that matter). The house secures the home loan, and if you default, the lender can take the house.
Unsecured debt is different. It is offered to you with no tangible assurances that you will pay it back. You are legally bound to do so, but the creditors or lenders do not have a “hard” asset to go after to force you to pay. In such cases, where debt is not secured by your home, creditors and lenders cannot take the house from you in order to recoup their money.
Securing unsecured debt
When getting out of debt, it is very tempting to use a home equity loan for debt consolidation. And in many cases it is easy to see why it would be desirable. The interest rate for the second mortgage is often lower than what you are paying on the unsecured debt, and you will find that is sometimes tax-deductible.
But what happens if you get in further trouble and can’t pay? When you take out a home equity loan for debt consolidation, you are taking unsecured debt and securing it with your home. This may result in you losing your house down the road, whereas if the debt had remained unsecured, your home would have been safe as long as you continued to make the mortgage payments.
Before deciding to use a second mortgage for debt consolidation, carefully consider your options. You may lose the house to your creditors.
Tags: home equity loan, unsecured debt, home mortgage loan, home equity debt consolidation,
second mortgage, debt consolidation home equity, secured debt
January 15th, 2008 at 7:11 pm
[…] of the questions you have to ask yourself is this: Do I want to secure my unsecured debt? A home equity loan for debt consolidation takes your credit card debt (and other consumer debt), […]