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Should I Get A Debt Consolidation Loan with Bad Credit?

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debt consolidation loan for bad credit

Debt can feel overwhelming for anyone, but if you have bad credit, tackling it can seem nearly impossible. Keeping track of what you owe, finding the cash to cover your bills and making payments to a half-dozen creditors as you rack up interest each month may be discouraging, but there are options to help you through. Debt consolidation loans is an option when dealing with bad credit but are they the best choice?

Handling debt with bad credit – consider debt consolidation

If you have a bunch of outstanding bills with different minimum payments, penalties, and due dates, debt consolidation is one way to get organized and perhaps even reduce the interest you pay over time.

A debt consolidation loan may allow you to roll all your monthly bills into one payment. Not only does this simplify your finances, but it may qualify you for a lower interest rate than you have on one or more credit cards, which can save you money as you pay down your debt.

The most recent consumer credit data from the Federal Reserve found that the average credit card interest rate in May 2018 was 14.4%, while interest rates on 24-month personal loans averaged 10.31%.

Consolidation loans — unsecured personal loans are the most common type — are a more viable option than balance transfer cards for those with lower credit scores due to being able to qualify.  To qualify for a balance transfer credit card it’s best to have a credit score in the 700’s or higher.

Debt consolidation loans, on the other hand, can still be had with a bad credit score (580 or below). If you are able to secure a debt consolidation loan for bad credit, you’ll probably be dealing with fairly high interest rates. Before committing to a loan make sure you’ve budgeting so you don’t fall behind on your loan payments.

It’s best to compare loans regardless of your credit score to secure one with the best rates. Companies like LendingTree, the parent company to MagnifyMoney, allows those with a minimum of 500 credit score to compare up to five lenders to find the best option even when dealing with bad credit.

Use our widget below to find and compare the best debt consolidation loans for bad credit!

Compare Debt Consolidation Loans for Bad Credit

Is a debt consolidation loan a good idea for people with bad credit?

For borrowers without solid credit histories, a debt consolidation loan can be an option — but one that they should carefully weigh. Jonathan McAlister, a certified financial planner at Legacy Wealth Management in Memphis, Tennessee, said debt consolidation loans can help those with bad credit reduce their interest rates, pay down bills more quickly and keep better track of monthly obligations.

“However, it could have an unintended downside if the debt came from overspending and now the consolidation loan is being used to free up cash flow to continue an overspending habit,” he said.

Here’s a closer look at the pros and cons of getting a consolidation loan when you have poor credit.


  • It’s easy to shop around for debt consolidation loans. Many lenders allow you to pre-apply, telling you if you’re likely to get approved for a loan and what interest rates you could get. This lets you quickly zero in on the best lenders to work with.
  • You can combine different debt accounts into a single installment loan. The loan will have a single monthly payment that will be the same each month, making it easier to budget around it.
  • A debt consolidation loan could give you a chance to lower your interest costs. This is especially true if you’re facing expensive debt such as payday loans or credit card balances, as these types of debt typically have higher rates than what lenders charge on debt consolidation loans.
  • You have a clear path to getting out of debt. You can even choose a shorter loan term to get out of debt faster and pay less interest. Consolidating debt and repaying it responsibly can help you build credit. Using this loan to pay off credit card balances could lower credit utilization ratios. Adding an installment loan could also improve your credit mix, which could boost your score.


  • Getting approved for a debt consolidation loan can be tricky when you have bad credit. You might have to spend more time looking for a lender that will work with you or even add a cosigner to qualify for a loan.
  • Your new loan’s payments could be higher than previous minimum payments on credit card balances or other debt. If monthly costs are a concern, a longer loan term could be a wise choice — though it will increase what you pay over the life of the loan.
  • With bad credit, you won’t qualify for the lowest debt consolidation loan rates out there. Some lenders will also charge origination fees to set up a loan, which could add to what you pay. Compare all options to make sure you don’t wind up paying more.
  • A shorter term will get you out of debt faster, but you’ll need to pay more each month to make this happen. Check monthly payment estimates to be sure you can afford to do so. Some consumers might see their credit score temporarily dip after taking out a consolidation loan, McAlister said. You’ll also need to stay on top of your bills and always make on-time payments to avoid damaging your credit.

6 alternatives to debt consolidation loans for bad credit

1. Debt management plans

If you’ve already tried to manage your debt yourself with little success, or if you aren’t sure where to start, a debt management plan may be a good option. In a debt management program, you consolidate your payments through a nonprofit credit counseling agency, which in turn negotiates interest rates and fees with your creditors. Your debt stays with the original lenders, and the agency takes your single monthly payment and distributes it.


  • You’ll make one payment each month rather than multiple to several creditors, which can simplify your debt.
  • You get help negotiating interest rates and fees down, so your debt is costing you less.
  • Ideally, you’ll pay your principal down more quickly and save on interest over time thanks to negotiated rates.


  • Debt management programs aren’t free — expect to pay an enrollment fee between $25 and $35, plus a monthly cost in that same range. If you don’t have the cash flow to make minimum monthly payments on your outstanding bills plus these fees, debt management likely won’t be a good fit.
  • You can’t use debt management to consolidate secured loans such as an auto loan or a savings-secured loan.

2. Home equity loan

A home equity loan is a type of secured loan in which you receive a lump-sum payment in exchange for putting up your home as collateral, which the lender uses to guarantee that it’ll get its money back if you don’t pay. As a result, lenders are often more willing to work with those who have less-than-excellent credit and to offer lower interest rates than you might get on an unsecured loan.

Here’s what you should know about consolidating debt with a home equity loan.


  • You can get approved for a home equity loan even with bad credit. The loan is secured by the home, which lowers the lender’s potential risk and can make it likely to accept applicants with poor credit.
  • Home equity loans traditionally offer lower interest rates than unsecured loans. This can make a home equity loan a more effective way to consolidate debt in a way that lowers your costs.
  • Ideally, you’ll pay your principal down more quickly and save on interest over time thanks to negotiated rates.


  • If you don’t own a home, a home equity loan won’t be an option — and if you do, you must have enough equity built up to qualify.
  • The lender can foreclose on your home if you default. If you already have poor credit and struggle to make payments on existing credit lines, a loan that puts your home at risk could add to your debt woes.
  • Home equity loans can have more upfront costs than personal loans, such as application fees, appraisal fees, brokers fees, and closing costs.

3. Home equity line of credit

Like a home equity loan, a home equity line of credit (HELOC) is secured by your property. But instead of a fixed-rate loan you pay back over time, a HELOC is a revolving credit line similar to a credit card — you pay interest at variable rates, but only on what you draw. In general, your “draw period” lasts between five and 10 years.


  • You can borrow up to the credit limit on your HELOC, giving you more flexibility in how much and when you borrow.
  • A HELOC has similar qualification requirements as a home equity loan — and similar limitations. It might be easier to get a HELOC with bad credit than, say, a personal loan.
  • You’ll face lower closing costs on a HELOC than you would on a home equity loan. Some HELOCs even have discounted introductory rates that you can take advantage of to pay off debt faster.


  • HELOCs often have a minimum draw or an amount you must borrow. If you don’t borrow at least that much you could face a fee.
  • Similar to credit cards, HELOCs have variable rates that can rise if market interest rates go up, meaning you could end up with a higher rate later.
  • If you don’t own a home, don’t have much equity built up or have a limited or difficult credit history, lenders are less likely to take that risk. Not paying off your HELOC balance can also put your home at risk of foreclosure.

4. Cash-out refinance

A cash-out refinance is a third way to leverage the equity in your home in which you apply for a new mortgage that exceeds the amount of your existing loan and receive the additional amount in cash.


  • Unlike a home equity loan, a cash-out refinance is a first mortgage, so interest rates may be more favorable and poor credit less of a limitation.
  • A cash-out refinance can also be used to lower your current interest rate or improve the terms of your mortgage, such as switching from an adjustable rate to a fixed rate.


  • You’ll need to have equity in your home to benefit from a cash-out refinance. You’ll also need to maintain a loan-to-home-value ratio under 85%.
  • As with a home equity loan, a cash-out refinance can bring in several fees and closing costs. This can add to what you owe or offset savings from a lower interest rate.
  • This option will likely lengthen your mortgage, keeping you in debt longer and increasing the interest you pay on your home.

5. Negotiating a debt settlement

Debt settlement sounds similar to debt management, but they are not equal. For-profit debt settlement companies help you negotiate and settle debt in collections using payment plans or a dedicated savings account.

Alternatively, some creditors may be willing to negotiate with you directly. If you have outstanding medical bills with a hospital or a physician’s office, for example, you may be able to reduce or even eliminate your debt. It doesn’t hurt to call your creditors to ask about your options.


  • Successful debt negotiation can help you eliminate debt for much less than you owe.
  • If you can settle a debt, doing so can help you get rid of unaffordable debt and avoid bankruptcy.


  • Most debt settlement companies will charge you a fee to negotiate debt on your behalf, but can’t guarantee a beneficial outcome. These can vary widely, so compare different services so you don’t end up overpaying.
  • Watch out for debt relief scams: If a company asks for fees upfront, makes any promises or pushes you to sign up for services, avoid it.

6. Bankruptcy

Bankruptcy is a debt relief option that can help you discharge your debt and start with a clean slate.

Under Chapter 7 bankruptcy, also known as liquidation bankruptcy, a trustee will sell off some of your unprotected assets to partially repay your creditors. The court will then discharge your remaining debt.


  • Bankruptcy will discharge many of your debts, providing relief if you’ve accrued more debt than you can realistically repay.
  • Filing for bankruptcy will immediately bar lenders and collection agencies from pursuing payment from you.
  • You can keep certain assets through a bankruptcy, including retirement accounts, your home, and other essential personal property.


  • Declaring bankruptcy will significantly lower your credit score and make borrowing difficult. A bankruptcy can be listed on your credit reports for up to 10 years. However, the impact lessens over time and the process can help you move on from your debt more quickly.
  • You’ll lose some of your property, which will be resold to satisfy your outstanding debts.
  • Some debt and financial obligations are very difficult to wipe out in bankruptcy, such as student loans or back taxes.

To qualify for Chapter 7 bankruptcy, you must also undergo a means test. If your income exceeds the threshold, you might be eligible for Chapter 13 bankruptcy. In this scenario, you get to keep your assets but will be required to repay your debt over three to five years.

What option should I use?

Debt consolidation loans are a good option but aren’t the be-all and end-all for those with bad credit. Before you commit to anything, determine what you’re eligible for, weigh all your options and calculate how much each will cost over time. And don’t be afraid to ask for assistance.

“Consumers should always approach debt with a plan to pay it off,” McAlister said. “Seek professional help from a financial planner if you feel in over your head.”

This article contains links to LendingTree, which owns MagnifyMoney.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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A Guide to Secured Loans

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In this guide, we’ll talk about several different secured loans, and the pros and cons of each so you know exactly what to expect before you borrow.

Part I: Secured Loans 101

A secured loan is backed by an asset that you own outright, like a paid-off vehicle or the equity in your home. You put up that property as collateral, and a lender uses that collateral as assurance that they’ll get their money back if you don’t pay. In some cases, secured loans can be allotted for any purpose the borrower chooses.

Home equity loans (HELs) and home equity lines of credit (HELOCs), for example, use the equity a borrower already has in his or her home as collateral. These loans might go toward home improvements and repairs, but consumers also use them to pay for education or debt consolidation.

Each lender has different requirements for the type of collateral they will accept, though it’s most often some form of tangible property with substantial value: a home, car or boat, for example. Auto title loans allow you to put up your vehicle title, and payday lenders take future income — hence the term “payday” — and sometimes even small home appliances as collateral. If you are applying for a secured credit card, your own cash is used as collateral. You can even use a savings or investment account to secure a loan.

For some secured loans, like high-fee payday or title loans, the barrier to entry is very low. Lenders may not require a credit check, and you can walk out with cash in just a few minutes. These usually fall under the category of predatory loans, and although they are easy to obtain and have short loan terms, they are difficult to pay back and escape.

For home and auto loans, borrowers usually have to demonstrate a minimum level of creditworthiness. Secured credit cards are a unique type of secured loan in that they don’t usually require a good credit history and instead are used primarily to build or repair credit on a low-limit card.

The different types of secured loans

Secured card

A secured credit card is often used to build credit, either for consumers who don’t have a history, or those who are trying to recover from dings like bankruptcy or accounts sent to collections.

To obtain a secured card, the borrower must put down a minimum deposit as collateral. The line of credit available for use is usually equal to the deposit amount, though in some cases it can be higher.

The borrower can use their secured card just like a normal credit card — and in order to build credit and avoid interest, he or she should manage the balance and payments responsibly. Minimum deposits for secured cards range widely from $49 to $750, and some carry annual fees up to $50 or more.


With a home equity loan or home equity line of credit, the borrower puts up the equity in his home as collateral — essentially, this means borrowing against the amount your home is worth minus your current mortgage balance.

HELs, like a traditional installment loan, are made in a set dollar amount with fixed payments over the life of the loan.

HELOCs, on the other hand, operate like credit cards. The borrower is approved for a dollar amount that he can draw against and pay off with a variable interest rate. These loans are often spent on home repairs but can be used for other major expenses like education, weddings, debt consolidation or in case of emergency.

In some cases, borrowers carry a zero balance for most of the life of their HELOC but feel secure knowing it’s available if the need arises. If the borrower defaults on a HEL or HELOC, the lender has the right to repossess and sell the home.

Payday loan

Payday loans are a form of lending in which a cash-strapped borrower receives cash with the promise of repaying the loan plus a fee on their next payday.

In this case, a postdated check for the total of the loan amount and fees or authorization to access the funds in your bank or prepaid account serves as collateral for the loan.

These small-dollar loans usually run on two- or four-week terms and although they are often for $500 or less, they carry an average 391% APR. This often traps borrowers in a debt cycle. According to recent research from the Pew Charitable Trusts, 12 million Americans take out these loans every year and spend $9 billion on fees alone.

Title loan

Title loans require the borrower to turn over their car title in exchange for fast cash.

Most lenders don’t require a credit check, and though terms and requirements vary widely, these loans come with hefty fees and interest rates. If the borrower fails to pay back the loan, he or she can either take out another loan with additional fees, or risk having the lender repossess the car.

The Consumer Financial Protection Bureau found that between 2010 and 2013, 20% of borrowers had their vehicles seized by lenders, and more than half of borrowers took out four or more consecutive loans to repay their initial amount.


A mortgage is used to purchase a home, which in turn serves as the collateral to secure the loan. Unlike some other types of secured loans, existing — and healthy — credit is important for securing a mortgage.

If you have poor credit, you’ll see higher interest rates and monthly payments, which means you could owe tens of thousands of dollars more over time than if you had a higher score. Lenders also consider your debt-to-income ratio, the size of your down payment, employment history and the size of the loan. If you fail to make mortgage payments, the lender has grounds to repossess your home.

Auto loan

Like a mortgage, with an auto loan the borrower uses the property they are buying — a vehicle — as collateral to secure the loan.

The lender, usually a bank, credit union or dealership, holds a lien on the car until the loan is paid in full. Monthly payments vary widely depending on the price of the car, the length of the loan contract and the APR you receive.

Similar to a mortgage, if you are late on auto loan payments, the lien holder can repossess your car and, in some states, do so without going to court.

Part II: Secured loans vs. unsecured loans

Whereas a secured loan is made using collateral a borrower already owns, an unsecured loan is offered based on a lender’s trust that you’ll pay back what you owe. The lender takes a bigger risk with an unsecured loan because they don’t have any collateral to claim if the borrower defaults. As a result, unsecured loans may come with higher interest rates and fees.

This isn’t always the case, however — rates and terms vary widely depending on the lender and type of loan as well as the borrower’s credit history. For some, an unsecured loan may not even be an option, as lenders may offer only a secured loan to a consumer who is considered high risk. Borrowers may also prefer to put up collateral and get more favorable terms offered with a secured loan over an unsecured loan.

Unsecured loans include credit cards and student loans as well as personal loans. Like cash from some secured loans, personal loans can generally be used for any purpose — according to data from LendingTree nearly 34% of personal loans are intended for debt consolidation and just under 33% are targeted toward credit card refinancing.

With both secured and unsecured loans, it’s important to know that nonpayment has serious consequences for your financial well-being. In addition to seizing collateral put up for a secured loan, lenders can send your unsecured loan debt to a collections agency and take legal action to recoup losses. Default puts your credit rating and access to future loans in jeopardy.


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A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

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  • Secured card

  • Mortgage

  • Auto loan


  • Payday loan

  • Title loan

  • Personal loan

  • Student loan

  • Credit card

Collateral required?



Credit required

Varies. Title lenders may not require a credit check, while an auto loan or mortgage lender will

Yes — history and score vary by product and lender. Most federal student loans don’t require a credit check, however.

Cost of loan (APR, fees etc.)

Varies with loan type. Interest rates for auto loans go as low as 5.2%, while rates for title and payday loans can hit triple digits. These also come with fees for rolling over to another loan at the end of a term. Secured cards have APRs ranging from 9% to 21.99% and annual fees of $0-50

Personal: As low as 3.99% APR with origination fees ranging from zero to 8%
Student: Federal interest rates range from 4.45% to 7% plus fees between just over 1% and just over 4%. Private loans have variable rates, some high as 14.24%.
Credit: APRs start around 6% and hit upward of 25%. May also have annual fees


Opportunity to build credit and to borrow more than you might be approved for with an unsecured loan

Don’t have to put up collateral, helpful in emergencies, can be used for any purpose — especially to consolidate higher interest debt


Risk of default and loss of collateral plus additional money and property, negative impact on credit

Higher APR and fees, risk of overspending and creating loan dependency, damage to credit if you can’t afford payments

Best for (what type of consumer)

Depends on loan. Secured cards help build (or rebuild) credit history, while payday and title (predatory) loans are not recommended

Consumers looking to consolidate high-interest debt or purchase big-ticket items they’ve planned for IF they can afford the monthly payments

Learn more

The pros and cons of secured loans

Secured loans — aside from predatory payday and title loans — are available from a variety of lenders. If you already hold accounts at a bank, this would be the first place to look. Credit unions also offer secured loan services, though you must be a member to access their products. Finally, look at online, nonbank lenders who focus on loans without offering traditional banking products. No matter what type of loan you’re looking for, shop around to ensure you get the best rates and terms.

When it comes to choosing a secured loan over an unsecured loan, there are some benefits and risks to weigh.


Secured loans may allow you to get more money with less credit.
Lenders are often more willing to lend higher sums to consumers if the loan is secured by collateral because they have something tangible to repossess or foreclose on if the borrower defaults, according to Andrew Chan, a financial adviser at Locker Financial Services, LLC in Little Falls, N.J. Because this is a lower risk for lenders, they may also be more willing to forgive lower credit scores.

Secured loans often have lower interest rates and fees than unsecured loans.
Because secured loans pose less risk to the lender, the borrower may be offered lower rates, fees and payments, says Chan. This may give you access to the cash or credit that you need but may not otherwise get — if you use it responsibly.


The collateral you put up is always at risk.
Even with the best-laid plans, taking on a secured loan means that your personal property may be repossessed. If you default, your lender can take your collateral, sell it and repay the loan with the proceeds. As the borrower, you lose amount you already put into the loan plus valuable property that may be difficult to replace.

Lenders may trap you with prepayment penalties and other fees.
Even if you want to get out of your secured loan and have the ability to pay off what you owe, you may get hit with prepayment penalties — fees that lenders charge borrowers who repay loans before they are due. If you do pay off a loan early, the lender makes less in interest, so they may try to keep you in a costly loan by making it too expensive to leave. With predatory lending, loan fees can quickly add up each time the borrower tries to extend the loan.

Under the Truth in Lending Act, lenders must disclose all charges and fees associated with a loan, so you should know ahead of time if prepayment penalties will apply.

Staying safe with a secured loan

An important part of taking on any loan or form of credit, secured or not, is knowing that you can handle the payments over the life of the loan and continue to afford other financial obligations. Here are five factors that may impact your ability to manage your loan:

Job security. Some secured loans, like HEL and mortgages, are long-term commitments (20 to 30 years) . Even if you have the income to cover your loan payments and still live comfortably now, think about whether your current career and employer offer enough stability to do so down the line, as well as whether you have marketable skills to find other opportunities next month, next year, or far in the future if necessary.

Cash flow. Just because you are able to put up property as collateral doesn’t mean you’ll be comfortable making payments on your secured loan. Look carefully at your income and expenses to determine if the monthly payments, interest and fees on your loan are actually within your budget, both now and (as much as possible) in the future.

Lifestyle. Even if you have the cash, the burden of taking on a loan could impact your ability to live the way you want to, says Johnna Camarillo, assistant vice president of equity processing and closing at Navy Federal Credit Union.

“Make sure that you don’t put yourself in a situation that according to the numbers, I can comfortably make my payments, but I can’t take a vacation or I can’t go out with my family as much as I’d like,” she told MagnifyMoney. “People should really look at their total lifestyle and look at how much disposable income they want.”

Future expenses. If you have kids (or plan to) and want to pay for college, aspire to buy a home or are close to retirement, this may impact your ability to continue to make loan payments. Plus, if you default on a secured loan, lose your property and damage your credit, it will likely be difficult to restore your financial situation to the point where you can afford these investments.

Total interest and fees. When you shop around for a secured loan, look at the total cost you’re on the hook for over the life of the loan — especially when you put up collateral you don’t want to lose.

“Sometimes people get attracted to a low monthly payment, and they’ll stretch it out over 15 to 20 years, but they don’t realize the impact that has on the amount of interest that they pay,” Camarillo said. She recommends looking carefully at interest rates, transaction and maintenance fees, as well as any fees associated with entering and exiting your loan.

MagnifyMoney has a personal loan comparison tool that compares rates and requirements for unsecured loans and a calculator to show monthly payments and interest paid over the life of a loan to help you understand the commitment you are taking on.

When it comes to managing a secured loan, having all the information and planning carefully for the long term is key. Don’t jump on what seems like a good deal without shopping around and budgeting, and don’t sign for a loan without understanding the risk to your property and your overall financial health.

What happens if you can’t pay?

If you get in over your head with any kind of loan, the first thing to do is talk to your lender. If you are a member at a credit union or a long-time customer at your bank, your loan officer may be able to help you with a plan to get back on track. Even payday lenders may be willing to work out an Extended Payment Plan (EPP), which allows borrowers extra time to cover their outstanding debt without added fees or risk of being sent to collections. You can also find ways to free up funds in your budget by cutting expenses large and small.

If you aren’t able to make payments and your loan goes into default, however, there are serious consequences.

Your credit takes a hit.
Payment history is the single most important factor in your FICO credit score — it accounts for 35% of the total. It is also considered “extremely influential” in the VantageScore model. Scoring models take into account bankruptcies, foreclosures and missed/halted payments, and having any of these in your credit history can have a long-lasting impact on your ability to apply for credit in the future. Even secured cards, which are primarily used to build and improve credit, can backfire if not managed properly.

“A lot of people fail at secured cards,” said Lauren Saunders, associate director of the National Consumer Law Center in Washington, D.C. “A lot of people end up defaulting, and their credit score is worse than when they started.”

You end up on a debt spiral.
Defaulting on a loan can quickly put you into a cycle of debt that is difficult to break, especially if you are caught in a predatory lending situation. These lenders operate by charging interest rates and fees so high that the borrower is unable to make a dent in the loan principal and continues to take out additional loans just to pay the excess that accrues.

Auto title loans are “incredibly dangerous” because borrowers continue to pay fees to extend and end up paying out far more than they expected or planned for, says Saunders. “They’re not getting out of debt, and eventually many people not only lose all that money they paid but they lose their car.”

In 2017, the CFPB issued a rule requiring payday and auto title lenders to verify a borrower’s income, expenses and ability to repay before issuing a loan, a move that in theory would protect consumers from entering an endless cycle of payday and title loan debt.

You lose your collateral—and possibly more of your assets.
If you default on a secured loan made with physical property as collateral, there’s a good chance you’ll lose that item at the very least. A lender may repossess your car, foreclose on your home or come after the boat, motorcycle or other valuable property you put up. If it’s something that diminishes in value, what the lender sells it for may not cover the full amount of the loan, in which case they may come after you for the difference, says Chan.

“Although the lender may be willing to offer higher loan amounts with a secured loan, consumers still need to make sure that they can afford the monthly payments associated with the higher loan amount,” he added.

Experts agree that the biggest risk with a secured loan is losing property you already own. When you put your home, car, paycheck or savings on the line, you must understand the consequences of default — especially if you are already in a difficult financial situation.

“The overarching theme is, ‘Can you afford to lose the collateral?’” said Saunders. “How catastrophic would it be for you if you lose the collateral? You shouldn’t put it at risk if you can’t afford it. You shouldn’t pawn your wedding ring, but you might be willing to pawn a TV.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Emily Long
Emily Long |

Emily Long is a writer at MagnifyMoney. You can email Emily here

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