Reduce Unsecured Debt – Complete Guide, FAQs & More
Unsecured debt can often rack up very quickly since it’s something people aren’t as careful with as secured debt.
While it’s true that unsecured debt has less severe consequences, it can still be crippling and is definitely something that should be kept in check.
In this post, I’ll be looking at how unsecured debt works and how you can utilise methods to effectively reduce the amount of money you have to pay back.
What is Unsecured Debt?
Unsecured debt, as the name suggests, is defined as debt that has not been “secured” against any asset. This means that nothing has been put up as “collateral” against the debt in case the debtor fails to pay it on time.
On the other hand, when it comes to secured debts, they are secured against an asset (or assets). For example, a mortgage loan is an example of a secured loan and the asset that has been put up to secure it is a house. If you don’t pay your mortgage payments, you could lose your home. A car loan is another example of a secured loan.
An unsecured loan, on the other hand, has nothing secured against it. This is why an unsecured loan is often harder to get approved for. You typically need a good credit rating in order to get approved for an unsecured loan.
Sometimes, even if you have a good credit score, you’ll still only be able to get approved for an unsecured loan with an extremely high interest rate.
Since an unsecured loan has no asset secured against it, the risk that a lender is taking is much higher as compared to a secured loan. In order to compensate for this risk, lenders charge higher interest rates when it comes to unsecured loans.
This is why secured loans almost always have much lower interest rates as compared to unsecured loans.
Some examples of unsecured debt include:
A secured loan is much easier to be approved for since you have an asset that you put up as collateral. Examples of secured loans include:
How do I Reduce My Unsecured Debt?
There are a number of ways to reduce the amount of unsecured debt you have to pay back.
The method which will be most effective for you depends on a number of factors such as the types of debt you have, how many debts you have, how much money you owe and how much surplus income you earn every month.
With that being said, let’s look at some methods to reduce unsecured debt effectively.
Balance Transfer on Credit Cards
Credit card debt can often be tricky to get rid of since an outstanding balance is something that always keeps increasing if not constantly kept in check.
When it comes to credit card debt, prevention is always the best cure. I always suggest to people to only use credit cards for things they need. Never use a credit card for an item that you can’t pay for in cash. Furthermore, always clear your outstanding balance each month.
That being said, if you do find yourself drowning in credit card debt, then a balance transfer is something that you can definitely consider.
This method involves you transferring your credit card’s balance onto another credit card that has a much lower (or 0%) rate of interest.
When it comes to credit cards, balance transfer is an effective way to reduce the amount of money you have to pay back.
That being said, some credit cards have balance transfer fees involved. Make sure that you are aware of all of the charges involved with a balance transfer on your credit card.
There’s no point using this method if the balance transfer fees are too high.
Debt Consolidation Loans
Debt consolidation is another great method of reducing unsecured debt. The principle here is the same as that of balance transfer in credit cards: reducing the amount of money you have to pay back by seeking lower interest rates.
A debt consolidation loan is a loan that you take out in order to pay off all of the debts that you have. In this way, you effectively merge all of the debts that you had into one.
A great benefit of debt consolidation loans is the fact that instead of dealing with many different creditors, you’ll now have to deal with only a single creditor.
Of course, in order to reduce your unsecured debt, you’re going to have to look for a debt consolidation loan that has a lower rate of interest than the debt(s) you currently have and are making payments towards.
There’s no point opting for a debt consolidation loan that has a higher rate of interest than your current debts. Doing this would only make your situation worse.
Debt consolidation loans can sometimes be difficult to get accepted for if you have a poor credit score and having a poor credit score is likely if you’re having debt problems.
In these cases, you may have to look for a specialised lender that deals with people with low credit scores.
Before you opt for a debt consolidation loan, it’s important for you to fully assess your financial situation and ensure that this is indeed the best option for you.
Of course, if you only have a single debt with a fairly low rate of interest, then going for a debt consolidation loan would be a pointless decision.
Hence, it’s a good idea to seek debt advice from a professional before you make any decision.
Be sure to seek debt advice from an independent debt charity and not a private organisation which would charge you for their money advice.
Formal Debt Solutions
Formal debt solutions such as an IVA, bankruptcy or a DRO can also play a great part in reducing the amount of money you have to pay back.
When it comes to bankruptcy and a DRO, you don’t have to pay any money at all. That being said, a bankruptcy would mean that your assets would be seized and sold off and a DRO is very difficult to get accepted for.
With an IVA, you’re going to have to pay back a significant portion of your debt but there’s a definite chance that you could get some part of it written off.
Unsecured debts often creep up on individuals and pull them down into financial ruin because it’s something they didn’t take too seriously.
While unsecured debts definitely have far less severe consequences than secured