Unsecure Debt Consolidation Loan

Debt Consolidation

Debt can be very overwhelming and at times can seem like an endless cycle. Sometimes the easiest thing to do is consolidate debt into one low monthly payment. This can lower your interest rates and allow you to concentrate on paying off the debt quicker than you would if you were paying on several accounts during the course of the month. There are two options available if you are considering debt consolidation:

• An unsecured consolidation loan
• A secure consolidation loan

Secure debt consolidation loans are backed by collateral such as the equity within an automobile or home, and can be a viable option in some instances. Consumers simply looking to consolidate debt without attaching the loan to collateral can apply for a debt consolidation loan that is unsecured.

How an Unsecure Debt Consolidation Loan Works

An unsecured consolidation loan allows you to borrow money without any type of collateral. This type of loan is often recommended by financial experts because it is a low risk loan for the borrower. If you default on your payments, you will not lose any of your assets.

Because most of the risk lies with the lender, you will be required to pay a higher interest rate than you would with a secured debt consolidation loan. Even so, this rate may be lower than the rate you currently pay on your high interest credit cards and other types of debt.

The amount of money that you can borrow with an unsecured consolidation loan varies depending on your credit rating, your income, and the lender you choose. Terms are typically flexible, allowing you to take anywhere from 1 to 25 years to repay the money that you borrow.

Finding a Lender

After making the decision to get an unsecured debt consolidation loan your next step involves finding a lender. Fortunately, many different lenders work with these types of loans. Good places to inquire include:

• Local Banks
• Area Credit Unions
• Online Lenders

Keep in mind that every lender has a limit when it comes to these types of loans. Just because one lender approves you for $5,000, it does not necessarily mean the next one will. Interest rates and loan terms also vary from lender to lender. Before you agree to accept an offer you should take the time to compare lenders. This is the only way to ensure that you get the best interest rate and terms on your consolidation loan.

Get Approved for a Consolidation Loan

To get approved for a consolidation loan you will need a good credit rating and a verifiable source of income. Remember that the lender is assuming most of the risk. If you can't prove you are creditworthy and able to make the required monthly payments you stand little chance of getting approved for the loan.

Here are several tips that may increase your chances of qualifying :

• Pull a copy of your credit report prior to applying. Address any errors prior to applying for a loan.
• Pay off as many of your bills as you can. The less consumer debt you have, the easier it will be to get approved.
• Find a reputable lender who is willing to work with you.

Cautions

Consolidating your unsecured debt can be a great financial tool only if you change the financial behavior that initially got you to the point of needing to consolidate debt. In other words, you are setting yourself up for financial trouble if you consolidate several credit card accounts but then turn around and start spending on the very cards you just paid off with the loan. A consolidation loan can be a fresh start for your finances and allow you to streamline your bill paying, but if used frivolously you can wind up in a worse situation than you began with. Ideally, you should close every account included within the consolidation once the balances are zeroed out by the loan.

You should also take care to make sure that your consolidation loan is at a lower interest rate than the accounts you intend to combine. Not every consolidation loan features a low interest rate, and some credit cards feature very attractive rates. You need to weigh the benefits of consolidation against the potential extra costs that may be involved if you cannot get approved for a loan with a very low interest rate.

Consolidation of several unsecured accounts into one loan can be a smart financial move, but be sure to use this type of loan judiciously.