Unsecured Debt Consolidation Loan – Complete Guide 2022
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When you’re struggling with your debt, consolidation may be a good way for you to manage it better and pay it back.
I’ve written this guide to discuss how you should go about consolidating debt. I’ve also added an FAQ section for further clarity and to give you a few tips.
Let’s get right into it.
Secured vs Unsecured Debt Consolidation Loans – Which is Better?
A debt consolidation loan is basically a loan you can get to pay off all your outstanding debts.
You may have heard how there are two main types of debt consolidation loans – secured and unsecured debt consolidation loans.
To put it simply, unsecured consolidation debt is debt where you don’t have to put up any asset of yours as collateral towards the debt.
However, a secured consolidation loan is one where you do have to put up an asset of yours, such as your vehicle, as collateral. If you fail to pay your creditor back, you run the risk of losing the asset.
Let’s look at which type of loan is better for you.
While there’s no single answer to this question, there are a few indicators that can help you decide better.
A secured loan is generally easier to get than a loan that isn’t secured. Also, the borrowing limit is often higher for secured loans, so you have access to more money. Lastly, you’ll usually get secured loans at a lower interest rate than their counterpart.
On the flip side, a loan that isn’t secured is harder to get than a secured one, but it doesn’t put your house, your car, or any other asset of yours at risk. Also, it may come at a higher interest rate than a secured loan, since you’re not putting anything up as collateral.
Both loan types have their advantages and disadvantages.
If you’re absolutely certain that you’ll be able to pay back the amount you’re borrowing in time, I recommend that you opt for a secured loan.
However, if that’s something you’re uncertain of and you don’t want to run the risk of losing a valuable asset of yours, go for a loan that isn’t secured.
How to Get a Debt Consolidation Loan with Bad Credit?
Okay, so let’s say you have bad credit and you need to borrow a debt consolidation loan. What can you do about it? Let’s take a look.
- Keep an eye on your credit score
Your credit score is ultimately going to decide if you’re able to get a consolidation loan at all and if you’re able to get it at a good rate.
In general, you need to be able to keep your credit score above the minimum threshold required for you to be able to qualify for a debt consolidation loan.
If you don’t know where to start, several banks offer free tools and options that allow you to view your credit report and any adjustments made to it over a certain period.
- Don’t limit your options
Even though it can seem like a bad credit score significantly harms your options when it comes to getting a consolidation loan, don’t succumb to the pressure.
You don’t have to take the first offer that comes your way, especially if you don’t know how good it is or if you know you can find better.
Take your time, look around, search your options, compare prices, interest rates, and the terms of the loans being offered.
Generally, the best way to do this is on the internet. You can get access to several debt help agencies to help you in this regard as well.
- A secured loan may be a good idea
If you have bad credit, a secured loan may be the best option for you.
In general, a secured loan is easy to get and doesn’t rely on your credit score as much as a debt that isn’t secured.
Moreover, you’ll get it at lower interest than a loan that isn’t secured, even if you don’t really have a good credit rating.
- Try to improve your credit score
One of the most pivotal things you should do is to try to improve your credit score as much as you can.
When you start making regular payments and keep paying on time, your credit score will eventually improve.
This is important because your credit report is usually the first thing creditors look at when they’re deciding whether or not to give you a loan or when they’re deciding the terms of your loan.
Is it a Good Idea to Consolidate Debts into a Single Loan?
If you can get a debt consolidation loan at a low interest rate, then it may be a good idea to consolidate your debts into a single loan.
Debt consolidation can get you much lower interest rates than usual. Debt consolidation loans generally have a lower APR than many other types of loans.
If you get the right debt consolidation loan, it’s possible that you’ll have to pay back a lot less each month than you usually would.
However, if you don’t owe a lot of debt, it’s probably not worth getting a consolidation loan over, since the processing fees and other associated costs will likely cost you a hefty sum.
Also, if you’re sure that the amount you owe is so big that a consolidation loan won’t help or that you won’t be able to pay back the amount of the loan even if it comes at a lower interest rate, it’s probably not worth getting it then.
If you have to take out a large personal one that you’ll possibly miss a few repayments on, it may drastically harm your credit rating.
How Much Does it Cost?
The costs associated with debt consolidation loans depend on the annual percentage rate or APR.
To put it simply, the APR includes the interest on the loan and any fees that your creditor may charge.
Different loans have different amounts of interest plans associated with them. If you’re applying for a consolidation loan with a variable rate, your monthly payments can be very hard to predict, so it’s a good idea to stay away from such loans.
How Do Consolidation Loans Affect My Credit Report?
In general, your credit score will dip a bit as you borrow the money since you’ll be taking a loan on top of the money you already owe.
However, even though your credit score will go down a bit, at least for a while, if you keep making regular payments, it’ll eventually start to increase again.
Debt consolidation may make it easier to improve your credit rating since you’ll have to pay less each month.
What happens if you don’t pay back debt in the UK?
The consequences of not paying back debt in the UK can range from damage to your credit report to potential court action, and a number of consequences in between.
Even if your creditor doesn’t take you to court to get you to repay them, your credit report will keep deteriorating as long as you keep delaying repayment. You’ll also be confronted by your creditors and debt collection agencies.
If bad comes to worse, you could risk losing your assets, such as your car and your house.
How long does a debt consolidation loan stay on your credit report?
Consolidation loans will stay on your credit report for a period of six years from the point where you pay them off or default on them.
When should I not consolidate debts?
There are two common situations where you shouldn’t consolidate your debts.
The first is if you have a debt amount that you can pay back in six months to a year. If so, you’re generally better off avoiding the fees, charges, and burdens that come with debt consolidation.
The second scenario is if you’re overwhelmed by debt and consolidation loans just won’t do the trick. If you can’t pay back your loans even with debt consolidation, consider a debt management plan or insolvency.
Winding it Up
Debt consolidation can either be a valuable resource to work your way out of debt or just another extra burden.
It depends on how and when you utilize it, and under what circumstances you avail of it.
I hope this guide helped you better understand the dynamics of consolidation.