Credit Card Debt Essentials

Understanding Debt

Two common answers people think of when they fall victim to financial problems are consolidation loans and bankruptcy. Many people are unaware that each of these options may bring new, more serious difficulties into their future and often they are only temporary solutions.

Many people who get a debt consolidation loan find themselves in deeper debt and in more financial trouble. Although having all your debts combined into one payment may sound attractive, consolidation loans will not decrease the amount of money you owe and you may be just turning unsecured debt into secured debt. Many people learn, too late, they can not borrow their way out of debt.

There are two types of consolidation loans, secured and unsecured loans.

A secured loan is when "the borrower" promises to give "the lender" property (collateral). If "the borrower" can not pay the loan, it may place their possessions in jeopardy. Using your home or automobile for collateral to obtain a loan can be a grave mistake.

If a costly hardship befalls you and your family, and you are unable to make your loan payments, the bank will take away your home or car. Consumers who turn to loans for help sometimes encounter additional problems.

For example, debt consolidation loans may have high hidden costs and may require your home as collateral. An unscrupulous company may misrepresent the terms of such loan agreements and borrowers may not even be aware that they may lose their home. No one should feel they have to risk everything they own to settle debts.

An unsecured loan is not secured by collateral that creditors could repossess, such as a house or automobile, if payments are not made.

For example, unsecured loans may include money you borrowed from a finance company where you did not sign a security agreement, money borrowed from friends or relatives, as well as some education loans, credit and charge cards, legal, medical, or accounting bills. Unsecured loans also may have high interest rates and can charge as much as a 30% interest rate.