Unsecured Debt Consolidation Explained

Unsecured debt is basically, any form of debt that is not tied to any existing, specific assets held by the borrower. This means there is no failsafe if repayments are not meant and the bank cannot take the repayments from some other asset.

What is  unsecured debt consolidation?

Unsecured debt consolidation is essentially combining all of your debts into one loan. Usually this is a personal loan. Most people have multiple loans or debts that they need to keep track of each month. Each individual loan has its own interest rate and fees attached. Rolling all these debts into one can help you organise and budget to meet your repayments on time, or quicker. Debt consolidation could potentially allow you to escape debts sooner than you thought!

Benefits of debt consolidation?

Unsecured debt consolidation is designed to help you keep track and make your repayments on time. There can be huge advantages to this form of debt management.

  • The interest rate on the personal loan could potentially be lower than your credit card interest rate allowing you substantial savings.
  • You only have one repayment to keep track of, saving time and stress.
  • You will incurr less late payment fees
  • Choosing a fixed interest rate will allow you to know exactly how much you are paying each month.
  • Choosing a variable rate will allow you to make extra repayments without incurring more fees.
  • Debt consolidation can also help improve your credit rating.

Disadvantages of debt consolidation?

Consolidating debts can be an effective debt management tool. However there things to watch or be aware of when considering these loans. Debt consolidation invovles cancelling your previous loan agreement and entering into a new one. There are usually establishment and discharge fees that come with the new agreement. For this to be a viable, long term debt management strategy, these new costs must be significantly lower than what you are currently paying to make this strategy worthwile.

  • You may incurr an exit fee on your current loan agreement
  • The fees and charges initally, can be more than you were previously paying on the old loan

Things to know about debt consolidation

It is worthwile to seek independent information when weighing up a debt consolidation strategy. Banks have their own agenda in these situations and may not always give the best advice for you. They can offer quite unfair interest rates, particularly once they know you are in financial difficulty. The other trap to be aware of is being offered "interest-only" terms for a few years. You will end up with an equivalent level of debt at the end of your loan and will have been essentially treading water, in a financial sense. Professional advice can help you navigate through the debt consolidation market and find the best loan for you, or another debt management strategy.


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