Checklist of considerations before applying for secured loans
Before applying for a secured loan to pay off debt, you may want to consider alternative financing options. Secured loans are not for everyone. Use the following checklist to ensure that you make the right choice.
Understand the risk of secured loans
Secured loans require you to use collateral to secure the loan. You may need to use your home, car, or other asset. If you fail to make your payments, the lender has the right to take possession of the asset. There are less risky options, such as credit cards and personal loans. These unsecured financing options may also provide a cheaper option for borrowing money.
Use your savings to pay down debt
If you have savings, use them to pay down your debt. While banks pay you interest for keeping money in a savings account, they charge you interest on loans and credit cards. It does not make sense to take on debt when you have savings available. If you use these savings to pay off credit cards, do not get rid of the cards. The available balance improves your debt-to-credit ratio. This ratio is the amount of debt that you have compared to the borrowing limits on your credit cards, and it impacts your credit score.
Consider the benefits of credit cards
Using a credit card to pay off debts may also provide a suitable solution. In many cases, you may find a lower temporary interest rate on a credit card compared to a secured loan. There are also credit cards that offer lower rates for new balance transfers. By transferring your debt to a credit card to reduce interest payments, you may pay off your debt more quickly. You also avoid the need to establish a new loan.
Shift your debt to other credit cards
If you have multiple credit cards, consider shuffling your debt to the cards with the best rates. You may even get special interest rates from the credit card company when you complete these balance transfers. When shifting debt between credit cards, always prioritise your biggest debts. These are the debts that you want to pay off first.
It is hard to keep up with debt payments when you do not have a budget. Include your rent or mortgage payments, utilities, food, gas, and other expenses. If possible, try to include a little extra in your budget for your credit card or loan payments. The extra money goes towards the principal balance instead of getting split between the balance and interest.
Consider remortgaging your home
Remortgaging may be a viable option for paying off debt. These are secured loans with lower interest rates compared to your original mortgage. After several years of paying down your principal and establishing more equity, you may qualify for lower interest rates, reducing your monthly payments. Keep in mind that remortgaging may extend the term of your loan. You are taking on a new loan. Instead of having 18 years remaining on your loan, you may now have 20 or 25 years. You may also need to increase your insurance if the total debt on your home increases.
Talk to a qualified debt counselor
After reviewing the other items on the checklist, you should consider talking to a debt counsellor. When you cannot find a suitable path towards paying off your debt, a debt counsellor can help you explore your options. Do not allow your debt to continue to pile up. Speak with an experienced debt counsellor to devise a debt resolution solution that works for you.