What is Unsecured Debt and Secured Debt?

In addition to undertaking a debt consolidation initiative, you may want to secure some of your creditor obligations with collateral. Basically, securing with collateral involves offering some tangible asset that a creditor can seize if you don't make good on an obligation within a designated time frame and according to preset rules. For instance, you may offer a car, a stock portfolio, or even your house to secure a long-term loan.

As any debt consolidation maven will tell you, a disorganized approach to a secure debt initiative can prove financially dangerous. That said, a secured arrangement can allow you to get lower interest rates and can inspire you to move quickly to budget so you don't loose the collateral. In addition, if the lender knows that she will get at least something out of the money relationship, she will likely allow you to negotiate better terms of repayment and to take out more cash upfront.

In addition, securing debt consolidation loans with real world assets may free up reservoirs of cash and/or protect certain pieces of real property from inspection come tax time. Arrangements can get quite complicated, particularly when corporate and personal assets are mixed in a debt consolidation regime, so talk to your tax advisor and crunch the numbers with a trusted accounting professional before you put up something large and important to your financial picture, such as your house, to qualify for a loan.

Another reason why securing your debt makes sense is that, if the lender ends up seizing your property, she won't necessarily go after your assets or other holdings. In other words, if you anticipate that you will have to default on a particular loan and lose your security, you can at least plan for how to countenance the blow, with an unsecured loan default, on the other hand, the lender can go after a diverse array of holdings. .

Read over all the terms of your debt consolidation and secure loan agreements carefully, and don't be pressured into signing a collateral arrangement unless you're completely satisfied with your contract.