PostHeaderIcon Three Reasons To Avoid Unsecured Debt Consolidation Loans


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When you have a lot of debt, one of the easiest ways to get that excess debt under control is by combining so that you have only one payment and a lower interest rate. However, if youâ??re considering unsecured debt consolidation, you may want to choose another option. Here are a few reasons why.

 

Reason #1: Low Maximum Borrowing Amount

 

If you choose unsecured debt consolidation, you are unlikely to borrow enough money to make much of a dent in your debt. The problem is that most lenders donâ??t like to take a risk on borrowers. If you had some type of collateral, such as your home or other property, youâ??d be able to get a larger loan and could more effectively combine your debt.

 

However, if you donâ??t have any collateral, the lenders are less likely to extend large amounts of credit, especially if youâ??re already fairly deep in debt. The result is insufficient loan amounts. Instead of combining all of your debt, you end up taking on additional debt while holding onto some of your old debt as well. Thatâ??s why unsecured debt consolidation defeats the purpose in most cases.

 

Reason #2: Higher Interest Rates

 

As you may already know, lenders tend to base the interest rates they charge on the amount of risk involved in lending the money. If you have a 700 credit score, for example, youâ??ll pay a lot less in interest. Additionally, if you have collateral, the lender has something to take if you fail to repay the loan. That means he or she wonâ??t have to write off a total loss. That means less risk and comparatively lower interest rates.

 

When you have an unsecured debt consolidation loan, you are putting the lender in a position of great risk, especially if you have a less than stellar credit score. That means youâ??ll usually end up paying a higher interest rate. Again, that defeats the entire purpose of debt consolidation which strives to lower your payments in part by requiring you to pay less interest over the life of the loan.

 

Reason #3: Less Reputable Lenders

 

While you want to be careful about making generalizations, by and large most banks and credit unions are not going to offer unsecured debt consolidation loans. The banks understand the tremendous risk to them and the low benefits available for you so thereâ??s no reason for them to offer such a product. That doesnâ??t mean you wonâ??t be able to find unsecured debt consolidation loans available, even if you donâ??t have a great credit history.

 

What it does mean is that youâ??ll end up working with some of the less desirable people in the industry. These would be the people who charge the highest interest rates, the highest fees for late payments, and the people most likely to make sure wish youâ??d never taken out an unsecured debt consolidation loan. Instead, you should focus your efforts on paying down the debt you have. 

 

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