Should I Turn Unsecured Debt to Secured Debt?
It is never a good idea to turn unsecured debt into secured debt. Many people will do this when they use a second mortgage or a home equity line to pay off credit card debt. Often people just look at the lower interest rate and monthly payment and do not consider the fact that they are moving unsecured debt and attaching it their home.
Difference Between Secured and Unsecured Debt
A secured loan is a loan that is attached to something. This guarantees the loan and means that if you are unable to pay the loan that the item that secures the debt will stand good for the loan. Banks have less risk when they do secured loans and as such offer lower interest rates on them.
An unsecured loan has no collateral. This means that the interest rate will be higher because the bank is taking a bigger risk on the loan. When you do not pay, the bank does not have a direct recourse on the loan. They can sue you for lack of payment and possibly garnish your wages in the future, but they cannot take your home away from you.
Danger of Changing Unsecured Debt to Secured Debt
If something were to happen to you and you fell behind on your credit card bills, the banks could sue you for payment, but your home would be safe as long as you stayed current on your house payment. If you had paid off those bills with a second mortgage or a home equity line and were unable to keep up with the payments, then the bank has recourse and can take your home away from you to pay off the debts.
If you were to declare bankruptcy, you can often work it out so you can keep your home, but that happens when you reassume the debts attached to the home. If you do not move your debt to a loan that is secured to the home if you do declare bankruptcy the loan will be cleared completely. The reason you do not want to move unsecured debt to secured debt is that you are trying to protect yourself from the worst possible scenarios. You should work to pay back the money that you owe, but still, protect yourself in the event that you were to lose your job or have some other type of financial emergency.
Alternatives to Getting My Debt Under Control
You should keep your home safe and only have the primary mortgage attached to it. If you have accumulated a great deal of debt you should begin by setting up a debt payment plan work to pay off your debt that way. If you choose to do a consolidation loan, you should do one that does not attach your home to the loan. The first step in getting control of your situation is getting on a written budget. Then you need to find extra money to put towards your debts. This will stop you from running the money back up on your credit cards. You need to be careful when you consolidate because if you do not change your spending habits you will continue to run up debt.
You may also want to consider debt counseling as a way to get a handle on your situation. One of the dangers of consolidation is that people continue to use their credit cards and end up maxing out their credit cards in addition to the consolidation loan. If you really want to change your situation, you need to start by changing how much you spend each month. Debt counseling can help you start to make those changes.
You may also want to consider debt settlement if you feel that the situation is out of control. It can have a negative impact on your credit because it will say settled instead of paid in full. This should only be an option if you are already months behind on your debt payments. When you settle debt, you will contact the credit card companies and offer a partial payment on the debt in exchange for the debt being paid in full. You will be taxed on any of the balances that are forgiven, and you should plan for that as you settle your debt.
These options will only work if you get your current situation under control. Start with your budget and stop going into debt each month. If you do not make enough money to cover your current bills, you should consider taking on a second job or find a way to cut your expenses so that you do not spend as much money each month. Consider getting a roommate or cooking at home more. The more you work on cutting back on your spending, the easier it will be to deal with your debt and improve your financial situation.