Debt is a necessary evil of financial management. While debt itself is not the problem, accumulating more debt than you can afford to repay, is. At some point, your circumstances might force you to take on multiple loans. Managing loan repayments and interest for each loan is no cakewalk. What’s worse is that missing repayments can be detrimental to your credit score. So how do you manage your debts efficiently?
A personal loan taken to consolidate your debt can help you turn the lumpy ride of financial management into a smooth sail.
In this article, we’ll learn about how an unsecured debt consolidation loan can alleviate your hassles of managing debt.
What is debt consolidation?
Put simply, debt consolidation means consolidating your debts into a single one. If you have lots of different debt in varied amounts, keeping up with the repayments can be challenging. Debt consolidation can help you combine all your debts into a single loan to:
- Help you manage repayments
- Lower your monthly repayments
- Get an interest rate lower than the interest you paid towards your debt mix.
All you need to do is some number crunching. Work out how much you owe towards all your debts in total. Apply for a personal loan to consolidate debt for the same amount. Now, repay all of these debts at once. This will leave you with a single loan and just one, convenient monthly installment.
A debt consolidation loan can be categorized as:
- Secured debt consolidation: A secured debt consolidation loan is one in which you’ve to provide collateral against the loan. If you default with repayments, you might lose the secured asset.
- Unsecured debt consolidation: An unsecured debt consolidation is one which is not secured against an asset.
What debts can be consolidated?
Ideally, you should consolidate debts that can be paid off early with an unsecured debt consolidation loan. The list includes, but is not limited to, the following:
- Credit card balance
- Loans – long-term and short-term
- Tax arrears
- Debt from a debt collection agency
- Bank overdrafts
- High-cost short-term credit such as payday loans
- Bailiff debt
- Outstanding utility bills
When you should consider unsecured debt consolidation
Following are some case scenarios, where taking out an unsecured debt consolidation loan makes total sense:
- If the loan doesn’t eat up a large chunk of your savings as charges
- If you can afford the loan, i.e., keeping up with timely repayments until the loan is repaid in full
- You use the loan as a chance to curb your urge of superfluous spending and become financially responsible
- You find a loan offer wherein the rate of interest is lower than that of all your loans combined and the total amount payable is less.
Plan your expenses before taking out an unsecured debt consolidation loan. Contemplate any events of the future that could potentially stop you from repaying the loan. Work out ways to ensure that you will be able to keep up with the repayments during the loan’s term.
When not to consider an unsecured debt consolidation loan
While an unsecured debt consolidation loan is a great financial product for those struggling to manage loan repayments, there are some cases where this loan is not the ideal option. We’ve listed a few of them below:
- If you can’t afford the repayments for the new loan
- If the loan doesn’t cover all of your debts
- The loan proves to be more expensive than all your loans combined – due to a longer loan term or higher interest rate
- If what you really need is help managing your debts, not your repayments, i.e., you need a debt advisor to help sort out your debts.
Pros and Cons of unsecured debt consolidation
Weigh the pros and cons of unsecured debt consolidation loans and check if this loan fits your purpose:
- Reduces monthly repayments: You might find an unsecured debt consolidation loan with lower monthly installments. This is especially helpful when you have multiple loans and a cumulative interest with them.
- The loan may be cheaper: Unsecured debt consolidation loans often have a lower APR than high-cost short-term credit options. So paying off all your short-term loans and only paying towards a single debt consolidation loan might actually be cheaper.
- Helps track debt: Managing one debt is way easier as opposed to keeping up with multiple loans. An unsecured debt consolidation loan makes the process convenient and straightforward.
- Boosts your credit score: If you manage your repayments well, it’ll help prove creditworthiness. As long as you demonstrate responsible credit behavior, a debt consolidation loan can give a boost to your credit score.
- The loan is unsecured: Saving the best one for last. The fact that this loan is unsecured means that someone with no assets can also avail of the benefits of this loan.
- Missed repayments can cause problems: If you miss a repayment, it can be detrimental to your credit score. Since you’re only managing a single loan, ensure that you make timely repayments.
- Repayment fee: Lenders can raise an issue regarding the premature settlement of your former loans. Several lenders charge an additional fee for early loan repayments. So read the fine print to check for the charges and plan accordingly.
Can I get an unsecured debt consolidation loan?
Debt consolidation loans are usually only available to homeowners. Unsecured debt consolidation loans can help you reorganize your debts without collateral. You won’t need to secure an asset like your property or car, against these loans. So long as you fulfill the lender’s eligibility criteria, you can get an unsecured debt consolidation loan or an unsecured personal loan to consolidate your debt.
How can Loan Broker help?
Whatever your reason to get an unsecured debt consolidation loan may be, it is important to shop around for the best offers. Now shopping around requires you to have a basic understanding of the lending market, which can be time-consuming. Loan Broker allows you to compare loans from multiple lenders and helps you find your ideal loan.