What Exactly is a Secured Debt Consolidation Loan?

A Credit Article Contributed by Brandie King

Introduction to Secured Debt Consolidation Loans

You might not realize that a secured debt consolidation loan is, in all reality, actually a home equity loan or second mortgage. These are simply three different terms for exactly the same thing. Before you consider taking one out though, you should learn about what they are and what they can do for you.

What Exactly is a Secured Debt Consolidation Loan Anyway?

Like mentioned above, it is the same thing as a home equity loan. A home equity loan is a loan that you take out as a second mortgage on your house that lets you use the equity you have built up in your house to pay off your debts. Equity is the amount of monetary interest you have in your house. You calculate the amount of equity you have by subtracting the amount you have left to pay on your mortgage from the appraised value of your house.

The resulting figure is the amount of equity you have and is the amount that you will be able to use to pay off your debts should you take out a home equity loan.

What are the Disadvantages of a Secured Debt Consolidation Loan?

The absolute worst disadvantage of taking out this kind of loan is the cold hard fact that you are putting your house at risk, and could lose it if you do not make your loan payments. To get a home equity loan you will have to use your house as collateral. For quite a few people this risk alone is enough to turn them off from a home equity loan. But that isn't all.

Home equity loans, which are in effect a second mortgage, are usually for a length of 20-30 years, which means that you will be taking longer to pay off those debts included in it that you would if you hadn't gotten a home equity loan in the first place, and will actually end up paying more because of the length of time it takes to pay off a home equity loan.

Of course, some people will just end up back in the same predicament that caused them to need a home equity loan in the first place because they will not change their spending habits, and instead (because doing a home equity loan restarts the credit cards included in it) will keep right on spending the same as they always have.

What are the Advantages of a Secured Debt Consolidation Loan?

The main advantage you get when you take out this type of loan is that all of your separate monthly payments to your creditors will be combined into one single monthly payment. You can normally only include unsecured debts, such as credit cards, student loans, old unpaid utility bills, and medical and legal bills. Another advantage is the fact that you will have a smaller interest rate, and therefore a smaller monthly payment, because of the fact that this is a secured loan.