Unsecured Debt Consolidation Loan

An unsecured debt consolidation loan may be one way you can deal with your credit issues if you are unable to balance multiple debt payments.

Consolidation loans allow you to borrow a lump sum to pay off your credit cards or other debt.

You then make a single payment on the consolidation loan instead of multiple payments with different interest rates on the smaller debt. Consolidations loans come in two forms: the unsecured debt consolidation loan and a secured consolidation loan.

Secured Consolidation Loan

These loans are generally easier to obtain because the lender will have collateral, usually your home.

This guarantees that the bank will be able to collect something should you default on the loan. Because the loans are secured, the interest rates on these loans can be attractive.

However, it is important to remember that if you do not make payments, you can lose your house.

These loans can be expensive to obtain, since banks charge fees, called points, to make the loans. Often one point is the equivalent of one percent of the loan amount. These loans provide some tax advantages, so they may be worth looking into.

Unsecured Debt Consolidation Loan

These loans are personal loans and the lender makes them with no collateral. These loans are riskier for the lender and therefore often discouraged if you do not have good credit or have a history of poor payment performance.

Because these loans are not secured, they usually have a high interest rate. Even so, the interest rate is generally lower than the rate on credit cards, so it may be worthwhile to see what your bank or credit union can offer.

These loans may work best for people who do not own their home or do not have much equity in their home. These types of loans may force you to stop spending and adding to your debt, particularly if you stop using your credit cards so you can make the required payments. They are also useful if the amount of debt you owe is not too large.

It is important to understand that these loans:

  • have a higher interest rate (above 10 percent is not unusual)
  • have a fixed term
  • may involve a line of credit (also called a revolving line of credit)
  • are not tax deductible and offer no tax benefits

The requirements for an unsecured personal loan may vary from bank to bank, but generally lenders are looking for the following financial habits before they will agree to make the loan:

  • good credit score
  • stable job
  • verifiable income
  • good credit history

If you are deficit in one or more of these areas, it may still benefit you to investigate unsecured personal loan requirements.

For example, your credit score may be low but you have been rebuilding your credit. If you talk to your banker, you may find he will be willing to help you in spite of the low score, because you have shown initiative and a willingness to change poor habits.

Current bankruptcy may automatically disqualify you with many lenders, but a bankruptcy that is more than two years old may be acceptable to a bank if you meet other criteria.

At the very least, your credit history should show that you have been making recent payments on time and that you are working hard to put your financial affairs in order.

Many bank lenders look at circumstances differently, so you may have to shop around to obtain an unsecured debt consolidation loan. Also, loan regulations change and rates vary, so if you run into issues today, check back in six weeks to see if anything has changed. Be polite but persistent and with luck you may find what you need.

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