A large number of people in the United States are in debt. When this debt reaches a certain point, an individual may search for ways to alleviate the financial burden. One of the most popular debt solutions is the debt consolidation loan. There are two main types of debt consolidation loans- secured loans and unsecured loans.

Secured Debt Consolidation Loans

A secured loan is a loan that is obtained using an asset as collateral. Suitable assets can include real estate, vehicles, stocks and bonds, or personal property. It can be difficult to find a lender willing to accept the more non-traditional forms of collateral such as jewelry or electronics, but most banks will accept real estate. Secured loans usually have lower interest rates than unsecured loans since they pose less of a risk to the lender. However, if a borrower defaults on a secured loan, the lender will attempt to collect the collateral.

Unsecured Debt Consolidation Loans

An unsecured loan is a loan obtained with no collateral. This type of loan is based solely on a borrower’s income and credit rating. Because there is nothing for the lender to collect on if the borrower defaults, unsecured loans are considered more risky to the lender and tend to carry high interest rates. However, even these higher rates are typically lower than most credit card interest rates, so unsecured loans can still be used in debt consolidation.

Conclusion

Both secured and unsecured loans can be used effectively in debt consolidation. Secured loans tend to have lower interest rates than unsecured loans, but either loan will carry an interest rate lower than the rate of most credit cards.