Many American consumers are completely fed up with how credit is offered in this country, but the reality is that credit card debt breaks new record each year, so it is safe to say the most United States citizens are addicted to credit. When consolidating debt you should always consider both secured and unsecured options.
Should you consolidate debt with a 2nd Mortgage or Unsecured Loan?
Credit Consolidation via 2nd Lien or Unsecured Loan?
If you are like most Americans you've probably racked up considerable debt trying to keep up with the Smith and Jones families down the street. According to www.cardweb.com, the leading online publisher of information pertaining to credit and other payment cards, you are not alone. In 2004, individuals who earned between $75,000 and $100,000 per year, and had at least one credit card, carried an average revolving balance of nearly $8,000. This doesn't even include other personal debts such as car loans, which can total in the tens of thousands.
What is a Bill Consolidation Loan?
Bill consolidation combines all of your debts together and pays them off using a single new loan. The next question of course is how to go about getting a debt consolidation loan. Visit a loan shark? Take out a second mortgage on your home? Apply for an unsecured loan at the bank and hope for the best? For the majority of folks a visit to the local loan shark is not a viable option; but taking out a 2nd mortgage or obtaining an unsecured loan from the bank are both excellent choices.
Second Mortgage Liens
A second mortgage is a loan or mortgage that is taken out after a first mortgage. It is similar to a first mortgage in that it uses the equity built up in a home as collateral. Similar to a first mortgage, a second mortgage consists of a fixed dollar amount that is paid out in one lump sum and repaid over a period of time typically 15 or 30 years. A 2nd mortgage may be either a fixed rate or an adjustable rate mortgage.
2nd mortgage loans are considered to be a higher risk and lenders often charge a higher interest rate; however, this rate is generally lower than an unsecured loan or the interest charged on most credit cards.
Unsecured Consumer Loans
An unsecured loan is a lump sum payout that is repaid at a fixed rate of interest in equal payments over a short period of time, typically 5 years or less. Unlike a second mortgage, collateral is not necessary to secure the loan. Loan amounts are relatively small, usually less than $15,000.
Unsecured loans have a couple of advantages over 2nd mortgages in that approval process can be quicker and there are no additional costs involved. Because the loan period is shorter and the interest rates are higher, monthly payments are also higher. Nor is the interest is not tax deductible. However, if you default on the loan, it may damage your credit but you won't lose your home.
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