What is Unsecured Debt consolidation Loan

Before we know about Unsecured Debt Consolidation Loan, let’s first understand some other important terms.

Secured Debt & Unsecured Debt:

Secured debt is a loan that has some collateral, where collateral refers to the assets you have put to secure loan, such as your house, your car, property, equipments etc. If you are unable to pay back the loan, bank can take the advantage of collateral by seizing and selling it. The money which is being raised by selling is used to repay the loan. In this kind of loan bank have less risk and it usually has low rate of interest.

Unsecured debt is a loan which is not linked to any assets or collateral. The bank has only your signature. These are also referred to as signature loan. To secure these loans you must have decent credit. Bank doesn’t have anything to go after if you stop repayment. They have to take you to court for nonpayment of loan but they cannot take away any of your asset. Due to higher risk on loan banks charge higher rate of interest on this type of loan.

Debt consolidation

Consolidation means combining, so debt consolidation means combining different monthly payments of loans, credit cards or any other debt into single affordable monthly installment. This is one way to combat with your all unmanageable debts and gain financial independence. .

Unsecured debt consolidation loan

This loan consolidates all your debts into single monthly payment of reduced amount. These loans are given by banks or financial institutions and normally have a higher rates of interest than secure loan, but these are approved faster .One should have a good credit rating to get this kind of loan approved by bank.

Advantages of Unsecured debt consolidation loan

These are ideal for persons not having their own assets such as own house or persons who don’t want to risk any asset.

The other benefit of unsecured debt consolidation is sometimes that managing wide variety of loans becomes very complex and it is better to combine then into single reduced installment.

These loans are can clear your debt in 3 to 5 years whereas secured loan takes minimum of 15 years to clear debt. .

In multiple loans, major part of installment is used to repay interest of loan whereas in single loan that amount may be less. When your debt goes down with each installment you feel motivated and it is easier to make payment.

Effect of Debt Consolidation on Credit ratings

Credit rating does not fall by taking debt consolidation loan, but instead as you have repaid to all other creditor which even their book shows your rating will not go down. Combine this with timely repayment of installments of consolidation loan. Both these factors collectively will have a positive effect on your credit score.

Unsecured Debt consolidation loan is a very important instrument to maintain a balance between your earning and debts. If you are in tight spot in sustaining your monthly payment, then you can go for debt consolidation. .