Loan Types And Options
You already know that debt consolidation involve getting a single loan to cover several debts you owe. But do you know that you have a couple of options when it comes to what sort of loan to take to begin with?
There are two types of loan to choose from - secured debt and unsecured debt. With each of these loans you can also choose to have fixed rate interest, adjustable rate mortgage or a combination of both. These variables cater for different borrower's needs and have sizeable impacts on the ultimate sum you'll pay on interest.
Secured Loan
Secured loan are called that as it involve a collateral. This means you take out a loan against the equity you have in the house you are staying in, your car, your land and so on. In the event that you fail to repay the loan borrowed, this collateral can be confisticated by your lender to be auction off in order to cover the loan.
As you can see, there is a huge consequences in losing your home or other valuable asset if you mismanage a secured loan. But the good news is, since your lender have some sort of security in hand, you are considered credit worthy and will likely score a lower interest loan.
Unsecured Loan
No collaterals are involved in a unsecured loan. An unsecured loan may be harder to obtain since you are already having bad credit record at this point. When you do get one, the interest is very likely to be higher than that of a secured loan. The allowed loan amount also will not be as high.
Your new loan monthly installment can be calculated based on a fixed rate, adjustable rate and hybrid loan. If you want to have the peace of knowing how much you need to pay each month then a fixed rate is for you. As the name imply, you pay a fixed interest rate no matter how high or how low the market interest rate fluctuate.
An adjustable rate loan is adjusted for every predetermined term - it could it adjusted yearly or quarterly as indicated in your loan agreement. You usually start with a lower interest rate, which explains why an adjustable rate loan is much more in favor than the rest. The amount of money you pay every month can be higher or lower depending on the current market rate.
A hybrid loan is a mixture of of both. If you are getting a personal loan or a debt consolidation loan from a finance company, you will most probably be dealing with fixed rate loan. Adjustable rate and hybrid loans are offered usually when you refinance your home for cash. Whatever loan you take, get your loan officer to work out the difference in the final sum you will have to pay at the end of the loan for comparison sake.
