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Unsecured Debt Consolidation

By Richard Greenwood

Republish: EasyPublish™
Published: 12Feb2009
Word count: 539
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Whether it is secured or unsecured debt consolidation loan is essentially a consumer loan. The proceeds from debt consolidation loans should go towards paying off higher-interest debts. In taking out debt consolidation loans you must not forget one thing: your overall debt level remains the same. The only thing you accomplish in these debt consolidation arrangements is that you've traded high-cost debt for lower-cost debt.

The advantages to you can be significant. For example, you may have ten credit cards with a total outstanding balance of $15,000 and annual percentage rates ranging from 8 percent to 20 percent. Consolidating all these accounts into one $15,000 debt consolidation loan at say 9 percent interest will probably provide great relief to you.

For one thing, you would only have to write one monthly check for loan repayment. Obviously, the biggest benefit is that you pay less interest on the debt and more of your repayment dollars go towards paying off the principal.

Debt consolidation loans come with a serious risk. They tend to make you think you're now free to rack up more debt on your liberated credit cards — which is the reason for the reminder stated above. If you go ahead and do that, you could end up in bigger trouble than before.

If you are used to paying only the minimum payment on your credit cards, you will get disoriented with the terms of debt consolidation loans. The monthly payments are likely to be higher than such minimum payments. You will have to tighten your belt as you make up for past excesses.

In taking out debt consolidation loans, avoid stretching out the payment (usually in order to have a lower amount in monthly payments). Doing this will mean your total payments for interest and fees will be bigger. That will not make sense financially.

Since credit card and personal debts are unsecured, the safest thing would be to get an unsecured debt consolidation loan to replace them with. The interest rate for an unsecured debt consolidation loan will be higher than its secured version, but you will not be putting any of your assets at risk in case things don't go as planned.

You will need to have healthy finances and a good credit history to qualify for an unsecured debt consolidation loan because you are not pledging any asset as security which the lender could rely on. Granting that you do qualify, the bank will very likely lend no more than $5,000 in unsecured debt consolidation loan. If you need more money, you'll have to turn somewhere else.

You could try arranging for secured debt consolidation loans. This requires that you put up an asset as collateral. The bank will put a lien on it and take it away from you if you fail to follow the loan payment schedules. If you have no asset to offer, then secured debt consolidation loans are simply out of your radar screen.

The easiest unsecured debt consolidation loan you can arrange is transferring balances from several credit cards onto a low-APR or a zero-percent promotional rate credit card. If you do this, you should strive to make substantially higher payments than the monthly minimum and/or to pay off the entire balance within the promotional period.

Article on unsecured debt consolidation by Richard Greenwood of the Click 4 Group. Richard writes regular articles on consumer finance with tips to get through the economic downturn. He is Director of credit card offers website click4credit.com.au

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