Benefits of Debt Consolidation: Secured vs Unsecured Loans

Benefits of Debt Consolidation: Secured vs Unsecured Loans 1

Debt consolidation involves combining multiple debts and converting them into a new loan to pay off other consumer debts and liabilities. The new loan taken is in the form of a single, larger debt, which comes with more favorable payoff terms like lower monthly payment, a lower interest rate, or both. Debt consolidation is a useful tool to deal with credit card debts, student loan debts, and other liabilities.

Different ways to consolidate debt

You need to do diligent research on the best interest rate and lowest fees available on new loans. Repayment terms, interest rates, and fees can vary from one lender to another. Let us look at various ways to consolidate debt:

Personal Loans

Personal loans or small business loans can come from banks or other financial institutions like credit unions or online lenders. The interest rates on personal loans depend on your credit score, financial status, and income. These normally come with a repayment tenure of 3-5 years. Most of these are unsecured and require no collateral, and you can use this loan to pay off other liabilities and consolidate your debts into a single personal loan.

Benefits of Consolidating Debts Using a Personal Loan:

  • You could reduce your interest rate.
  • You could lock in a low rate which is linked to a financial index.
  • You could also get a fixed-rate consolidation loan.
  • You will have a repayment timeline. You must remember that there could be a prepayment penalty if you choose the pay the personal loan before the schedule.
  • You could boost your credit scores if taking up a personal loan results in on-time payments and a lower credit utilisation rate.

Balance Transfer Credit Cards

Balance transfer cards come with a convenient 0% promotional interest rate for a few billing cycles. Some banks charge a small fee to transfer the balance. Creditors decide the amount which can be balance transferred based on the policies and the borrower’s credit line. One should be wary about the high interest rates levied after the promotional interest rate expires. 

Benefits of Debt Consolidation: Secured vs Unsecured Loans 2

Home Equity Loans

You could borrow a home equity loan against the house, using your property as collateral and consolidate your debt. These come with lower interest rates, but this also means that if you can’t pay the loan back, you could lose your house.

Benefits of Debt Consolidation

You Can Convert Multiple Payments Into a Single Payment

Debt consolidation results in lower monthly payments because of a longer payoff period. You can feel a huge load of burden and weight off your shoulders by consolidating various loans from credit cards and other loans into a single payment structure. You are done with multiple payments and multiple deadlines. You are left with only one debt source.

You Can Get the Benefit of Lower Interest Rates

Most unsecured debts, like credit cards, come with a high interest rate that can increase your debt each month. The primary objective of finding an apt new loan is to reduce interest rates and convert all other debts into one new loan. The fixation of the interest rate greatly depends on the credit score.

For example, an individual with a credit score ranging from 720-850 may have to repay a loan at a rate of 4-20%, while someone with a credit score from 300-639 may have to pay off the loan at a 15-36% interest rate.

You Can Effectively Improve Your Credit Score

By consolidating your debts into a single loan, you reduce your credit utilization rate, which eventually results in boosting your credit score. Initially, when applying for a new loan, there may be a temporary dip in your credit score, but it will improve in the long term, resulting in lower interest rates on future loans. 

You Can Reduce Stress and Anxiety

By consolidating all your loans into one, you avoid the stress of dealing with multiple deadlines and varying interest rates. With all your loans now combined in one, you’ll be able to make a consolidated payment once every month at a lower interest rate due to the high value of the installment itself. With this, you don’t have to worry about missing payments, which will negatively impact your credit score. 

You Can Pay off Your Debt Faster

A benefit of debt consolidation is that it has a shorter payback period. It considers various factors like income, credit score, the length of the loan, and the amount a person owes to frame a diligent one payment plan.

Types of Debt Consolidation Loans

It means taking a single loan to pay off multiple debts. There are two different kinds of debt consolidation loan: secured loans and unsecured loans.

Secured Loans vs Unsecured Loans

There are two broad types of debt consolidation loans: secured and unsecured loans.


Secured loans are backed by one of the borrower’s assets, such as a house or a car. The asset, in turn, works as collateral for the loan. Unsecured loans, on the other hand, are not backed by assets and can be more difficult to obtain.


A secured loan uses collateral to protect the lender from a loss if the borrower fails to repay a loan. Examples are home loans and car loans. Unsecured loans don’t rely on collateral but come with higher interest rates and shorter payoff terms.

Rates on Interest and Qualifying Amounts

Unsecured loans tend to have higher interest rates and lower qualifying amounts. But the risk on the borrower is lower than in the case of a secured loan. In most cases, the interest rates are fixed in unsecured loans, so they do not differ over the repayment period.

Ease of Access

Secured loans are easy to obtain as the collateral plays a pivotal role in getting the loan. For an unsecured loan, you need a strong credit history and a higher score to qualify.

Loan Amount

Secured loans allow you to borrow more money at lower rates, but unsecured are more difficult to procure, and the amount you will receive will be lower.

The Choice Between a Secured or Unsecured Loan

There are times when the borrower is not given the choice of obtaining a secured or an unsecured loan. For example, in the case of a home or a car loan, collateral is a must, and the borrower will have to abide by the norms of a secured loan only. This further accentuates your credit score and builds your goodwill.

Effect on Credit Scores

Secured and unsecured loans impact your credit rating in almost the same way. Consumer credit companies like Equifax, TransUnion, or Experian will do their reporting on the credit card limit, payment history, balance, and other negative information, like foreclosures, defaults, collections, or legal judgments


A secured loan should be preferred when you know your repayments using home loan eligibility calculators, and you have greater financial flexibility and more savings options. An unsecured loan should be preferred when you need immediate funds that are not huge, and you don’t have an asset to a mortgage.


A secured loan can be a car loan, a home loan, or a loan where stock, machinery, raw material, building, or jewellery is mortgaged. An unsecured loan can be a personal loan for taking a vacation, a credit card for short term borrowings, or a bank overdraft.


Debt consolidation comes with significant gains that make it a worthwhile option to consider. It consolidates your debt sources into one simple monthly payment, which can boost your credit score, comes with a lower interest rate, and it will allow you to focus on other relevant things.

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