Bad Debt Secured Loan Vs Debt Relief Program
Is a Cheap Secured Personal Loan Really the Best Option?
Oct 6, 2009
When repayments on debt are no longer affordable, urgent action needs to be taken to address this imbalance. The most effective way of negotiating an income and expenditure imbalance is either a bad debt secured loan or a debt relief program.
Secured Loans Overview
A cheap secured personal loan is granted based on the provision of collateral (a home, care etc). The borrower enjoys a lower rate of interest and the opportunity to spread repayments over an extended borrowing term. Default will mean that the lender will repossess the asset to recover their money.
Free Debt Relief Help
- Debt Management Plan. The aim is to improve affordability. Following a budgetary analysis, an affordable monthly repayment will be offered to creditors. As is the case with a bad debt secured loan, repayments will continue until the money owed is completely cleared. Further interest payments and charges are often frozen by lenders to aid the debt clearance process.
- Debt settlement program. Following a negotiation process, up to 50% of all unsecured debt is written-off. The remainder is repaid over a 12, 24 or 36 month period. The period of time is considerably shorter than a cheap secured personal loan, but the reduction to the principal helps ensure that any debt is paid-off relatively quickly.
Cost of Borrowing
Poor credit means that the rate of interest on future credit agreements will be higher. Whilst the provision of collateral and an extended term will help to improve affordability, the rate may be higher than on existing forms of credit. Check this before proceeding.
A debt relief program, such as a debt settlement program, is not 'just' another loan. The objective is to help someone to become debt-free in less than 3 years. The absence of further interest payments and writing-off up to half of the principal helps in terms of achieving this objective.
Unsecured Debt Vs Bad Debt Secured Loans
It is possible to consolidate both unsecured and existing secured debt with a cheap secured personal loan. However, a debt relief program is only suitable for dealing with unsecured debt. Creditors will not be prepared to agree to less favorable terms when they can sell the collateral to realise their funds.
FICO Credit Scores
Up to 30% of an individual's FICO credit score is concerned with reliable payment. This means that consolidating debt with a loan is likely to assist. However, 25% of a score is based around the individual's debt to income ratio. A debt settlement program is far more effective at achieving this objective.
Fees and Management Charges
It is normally possible to get free debt relief help from a non profit credit counseling service. However, a 15% fee will be charged for administering a Debt Management Plan or debt settlement program. Beware of any company that seeks to front-load charges (receive payment in advance).
A bad debt secured loan also involves paying legal and brokerage fees, although these are normally added to the principal. Be aware that, should the borrower wish to pay off the debt early, an early redemption penalty will normally become payable.
Available Equity
A secured homeowner loan will only be available to those with sufficient home equity. Given the recent retraction in house prices, fewer people will now qualify. Using up further equity could also mean that it is more difficult to move home in the future.
There are a number of important considerations for those considering whether to take out a bad debt secured loan or commence a debt relief program. Always think carefully before turning unsecured debt into a debt that is secured on the family home.
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