At the heart of debt consolidation is the interest rate you may be paying. Banks and finance companies charge higher interest rates depending on whether your loan is secured or unsecured.
Simply put, a secured loan is when an individual pledges a form of personal asset to the creditor, as a backup payment if they cannot make their scheduled loan repayments. In this situation, the lender will sell your promised asset to make up for the repayments. A secured loan’s collateral may include land, machinery, facilities, or vehicles, depending on the type of loan.
On the other hand, an unsecured loan does not have a pledged asset as a backup for loan repayments. If you haven’t pledged specific collateral as protection on your loan, your savings can be used to repay the outstanding debt if you can’t afford payments.
Depending on which financial option you choose will heavily influence your loan’s interest rates. Debts that are unsecured, e.g. personal loan and credit card interest rates, are usually 4-10% higher than a mortgage or home loan interest rate. If you can consolidate your debt under your mortgage, you will be paying substantially less interest.
Debt consolidation will also alleviate the pressure of making numerous debt repayments and reduce the amount you pay each month. For example, if you have two or more personal loans or credit cards with a total outstanding balance of $30,000, you are required to make repayments of approximately $800 per month.
By consolidating all your debts into a single loan with a lower interest rate and over a longer term, you may be able to reduce your monthly repayments substantially to approximately $550 per month and save $250 per month.
Repayment plans are often tailored to suit your budget and lifestyle needs. Debt consolidation can also provide budgeting assistance to help you keep on top of your repayments and avoid getting into further debt.