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3 Ways of Resolving One’s Unsecured Loans through Loan Consolidation

Unsecured loans, also referred to as personal or signature loans, are called such because they are acquired by a person through the merit of his creditworthiness, instead of putting up a property to serve as his collateral. To gain the approval of the lending institution when applying for an unsecured loan, a borrower’s financial profile should show that he has high credit ratings.

 

 
The fact that no property is required from the borrower to serve as his loan collateral in obtaining unsecured loans makes it inevitable for lending institutions to treat them as high-risk loans. This is the reason these loans carry with them interest rates that are higher than the ones placed on secured loans, like in the case of mortgage loans.

The advantage of this type of loan includes charging the borrower with interest rates that may be high but are still lower when compared to those that come with the use of credit cards. On the other hand, the interest on an unsecured loan is not tax deductible like in the case of a mortgage loan.

Still, unsecured loans are a great for borrowers who do not possess the funds for the equity required in getting approval for their home loan application. Furthermore, an unsecured loan offers the flexibility of either applying for a definite loan term with a fixed interest rate, or obtaining it with an adjustable interest rate by serving as a revolving credit line.

There are three ways to obtain an unsecured loan, each with its own set of favorable features as well as potential risks.

Combining Several Unsecured Loans into a Single Loan

unsecured loans
When an individual is unable to pay off a number of loans that do not have collateral, he may choose to consolidate his loans. By combining his existing loans into a new loan, he has higher chances of paying them off. Consolidating loans also offers three direct results or benefits to a borrower: he can obtain a significantly lower interest rate; he has the chance to pay lower monthly amortizations; or he can enjoy both options at the same time.

Sources: Bank24 and Treasury.gov

Getting a loan consolidation is an effective way to pay off different types of debt that do not require putting up a collateral, such as outstanding credit card bills and overdue student loans. When applying for a loan consolidation, however, it is important to consider the risks involved.

Loan Term Extension – Although the borrower enjoys a lower monthly amortization scheme with an equally lower rate of interest, he should take into account that he will still be paying higher interest since the extension means that it will take him longer to pay off everything.

Maintaining One’s Spending Habits – Loan consolidation is not a guarantee that a person is already debt-free. It is important to start living beyond one’s means, and replacing unhealthy spending habits with money-saving ones. A good idea is to keep one’s credit cards out of sight and out of mind. This makes it easy for the borrower to prevent himself from using them and getting back into debt, which also helps him to avoid the temptation of applying for new credit cards.

 

 
Using a Home Equity Loan – This is not a good idea for loan consolidation. A borrower who goes for this option faces the risk of losing his home once he is unable to update his monthly payments. Using one’s home equity loan to pay off credit card debts may seem favorable because of the lower interest rates it offers, but the result is not, which is losing one’s property.

Going the Easy Route – The convenience offered by consolidating one’s collateral-free loans does not have to involve large fees, especially if the borrower does it himself and makes the effort of keeping track of his numerous monthly payments. He may also get help from a reputed nonprofit counselor who offers credit advice and can provide repayment services.

Combining both Secured and Unsecured Loans into a Single Loan

Appy for unsecured loan
When an individual has unsecured loans as well as secured ones, he has the option of combining all of them into a single loan to ensure being able to settle them. A great risk is involved, though, since it means pooling one’s properties to serve as collateral against a higher amount that resulted from the consolidated loans. However, there is still an advantage from this method, since the secured loans have reduced interest rates, which can offset the risk involved.

It pays to keep in mind the date when one has applied for a loan consolidation, whether it is for loans with collateral and those with no collateral. Having a higher credit rating during the times when the borrower had acquired the latter can result to him getting charged with an interest rate that is higher than the average. In the case of credit cards, however, this type of loan consolidation is still a big help in getting interest rates lowered.

Making a Consolidation Loan from One’s Retirement Account

This is a sound option for borrowers who have enough funds in their retirement accounts to give way to paying off existing unsecured loans. Choosing this option can provide a number of advantages: reduced rate of interest, the opportunity of getting one’s money returned, and the chance of maintaining a good credit history (since the new consolidated loan is not reflected on one’s credit report).

The loan should be paid back to ensure one’s financial security during retirement.
It is important to keep in mind that consolidating one’s loans is not an excuse to borrow more money. This is why seeking the help of a credit counselor should be considered.