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Debt Article | Debt Consolidation


Unsecured Debt Consolidation Loan

If you find yourself with a lot of different monthly outgoings to keep on top of, it can be tempting to explore other options. Consolidation loans work on the basis that you get an amount of funds so that you can pay off a set of other debts, leaving you just with the consolidation loan debt to deal with.

One bill

One natural advantage to consolidation loans is that you have only one debt to worry about, sometimes with a lower interest rate than you’re currently paying toward your other debts - although you should bear in mind that this may well change over the period of the loan.

There are a number of things that you should think about when considering a consolidation loan. Remember that the debt hasn’t gone away, you’re just paying it back to someone else.

Terms

It really does pay to check the terms and conditions on unsecured consolidation loans thoroughly. Make sure you understand exactly what your monthly bills will be, and that you’re sure you can afford them – be realistic about how much you expect to be able to pay each month.

Work out how long it’ll take you to pay the full amount of the debt off, bearing in mind such factors as fees payable if you pay the debt off early etc. Check what will happen, i.e. what charges you will face if you ever fail to make your payments, as this can amount to substantial sums of money.

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Unsecured vs Secured

When a lender gives you a loan, they will look to minimise the risk to them if you fail to pay the loan back as per the agreement you have with them. One of the things they typically do to minimise this risk, is to secure the debt in some way. This means that within the terms of the loan, the lender can effectively get their hands on whatever you’ve used as security, or ‘collateral’, if you fail to keep your payments.

The natural advantage to an unsecured loan is therefore that the lender doesn’t get to take any of your property if you fail to keep your payments, as all they really have as a guarantee is your signature.

Credit rating

Since lenders look for the lowest amount of risk to them, you will typically need to have a good credit rating to even be considered for an unsecured loan. If you have any bad debts from the past for example, a lender will be less likely to grant you an unsecured loan, and will prefer you to offer something as collateral in case you do indeed fail to meet your payments.

Rates

The downside to unsecured loans is that they often involve higher interest rates. If you’re thinking about taking one you really need to check the terms and conditions thoroughly. Check not only the interest rate over the whole period of the loan, but any terms relating to the period that you’re expected to pay the loan off over, and work out what it’s going to cost you overall.