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Secured Consolidation Loans - Useful But Not Perfect

By: Michael D. Strauss

Secured loans are often touted as an ideal solution to your financial troubles. The adverts you see online and on the TV present the happy smiling faces of people finally enjoying their lives after having put the nightmare of severe financial problems behind them. Of course, not everyone uses their secured loan for debt consolidation, but this is by far the most common reason for taking out these loans, and the freedom from money worries is the most prominent marketing message used.

Can you believe these adverts? There's no denying that a secured loan can be an effective debt handling technique if done properly, but it's also true that making a mess of a secured loan will have very serious consequences which you need to think about before becoming one of those smiley happy people yourself.

Firstly, by definition, a secured loan needs something of value to be secured against. While this asset can in theory be anything you own, in practice the only thing of value that most people can secure their finance against is their home. This of course leaves you open to the risk of having your home seized and sold should you get behind in your repayments. This is obviously a nightmare scenario, and while most lenders will work very hard to avoid repossession, the threat is very real and thousands of people lose their homes in this way each year. Are you sure you'll be able to afford your repayments, even if things take a turn for the worse with your income?

One of the key benefits you'll usually see presented as a reason to take out a secured loan is that you'll be able to secure a lower interest rate on your debt than at present. In the past, this conventional wisdom may have been able to be relied on, but in these days of financial turmoil, credit of any kind is becoming harder to arrange. When you take out a secured loan, make sure that you're not converting unsecured debt into secured debt that could risk your home, yet are not receiving a significantly lower interest rate to compensate.

Secured loans for people with credit problems have always been fairly expensive, and as lenders across the market tighten their lending criteria, this situation is only going to intensify.

Even if you can arrange a lower rate of interest, a classic secured loan tactic is to spread the debt repayments over a much longer term - even up to 25 years. This will result in more interest being paid overall, so even though the APR rate may look lower, it's still more expensive.

When you take out a secured loan, you're effectively cashing in some of the equity in your home (the difference between what your property is worth and how much is owed on it). This will make it harder to refinance your mortgage, should you need to do so, which could be a very important consideration considering the current state of the mortgage market.

Finally, no matter how attractively it's packaged, a secured loan doesn't get rid of your debts - it just combines them into one large one which will likely take you longer to clear albeit at a lower monthly cost.

None of this is to say that secured loans aren't a good thing or can't be effective in your particular situation. It's just that they are serious financial commitments with serious implications, and you should definitely give the matter serious thought before making your decision.

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Michael writes for Loan Vision, who offer advice on unsecured and secured loans for consolidation of debts and a wide variety of other uses.

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