In debt consolidation, the smaller loans are paid via a single loan. The debtor – you, for example – will just pay one monthly payment to one creditor instead of paying monthly amortizations to several creditors. The goals: To enjoy the benefits of lower interest rates and lower amortization as well as to pay off the lone debt faster and to skip on the negative consequences on your credit report.
But before you get dazzled by secured debt consolidation, you have to understand its requirements as well as its pros and cons. In a secured debt consolidation scheme, you have to put up a security, which can take the form of refinancing your home, taking out a second mortgage, or using other assets (e.g., car, life insurance) as collateral.
Secured loans typically carry lower interest rates because of the security. You will then be able to enjoy lower monthly payments and, in a few cases, you can declare the interest payments as deductions to tax. This is the case with interest paid on loans with real property as security.
But remember, too, that the risk of letting go of the pledged property upon default in the payment of the amortization is high. You may not want to lose your inherited property, such as land or collectible cars.
Always discuss your options in debt consolidation with a finance consultant before making your choice. Your goal is to pay off all of your debts, not to plunge into more financial problems with yet another bad decision.