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Understanding Debt

A large part of successful debt management involves understanding debt and how it works. We've put together this helpful guide on debt to tell you everything you need to know.

Debt Consolidation: Unsecured vs. Secured Loans

One of the major tiers of debt management, as explained previously, is debt consolidation. Within this category, there are two types of debt consolidation loans: unsecured and secured. Here is an explanation of each:

  • Secured loans. Secured debt consolidation loans require you to put up collateral against the loan. In the event that you cannot pay back the loan, you agree to allow the bank to seize your collateral. For example, some consumers use their vehicles or homes as collateral for debt management. This type of loan has both risks and benefits. On the positive side, secured debt consolidation loans often come with more favorable terms and lower rates than unsecured loans. Conversely, you run the risk of losing your car, home, boat, etc. if you default on the loan. That can be a big risk to take. Examples of secured consolidation loans include home equity loans, cash-out car or home refinancing, etc. Remember that you could be paying a secured debt consolidation loan for over 15 years, whereas debt management services can get you out of debt in 3-5 years.
  • Unsecured loans. An unsecured loan is just that-a loan unsecured by collateral. That means that if you cannot make the payments, the lender will not be able to repossess your home, car, etc. Unsecured loans include things like credit card debt, some education loans, some personal loans, and certain types of medical and legal bills. Unsecured loans have higher interest rates, as much as 30%. On the other hand, if you default on your payments, you don't run the risk of losing any of your possessions. Be careful when taking out unsecured loans because the interest rates are often higher than those of your present debts. Thus, in the long-run, you could end up paying more in interest expenses, which means it will take you longer to pay off your debt.

Six Ways to Pay Off Unsecured Debt

Even with the help of debt management services, you will still have to find a way to pay off your debt consistently and responsibly. Here are six tips to help you do so:

  1. Opt out of credit card pre-approval lists. Contact the credit bureaus to remove your name from these lists. They will only serve as further temptation.
  2. Don't use your credit cards anymore. To proactively pay down your debt, you're going to have to stop digging a hole for yourself. Don't use your cards while you're involved with debt management.
  3. Consolidate debts. This, of course, will be taken care of by your debt management company.
  4. Pay more than the minimum. Nothing will cost you more in the long-term than paying just the minimum balance.
  5. Make a plan. Write down a plan of attack for how you will manage your debt.
  6. Negotiate lower interest rates. Again, professional debt management will take care of this for you.