Unsecured Debt Consolidation Loan – Complete Analysis, Tips, Guide, FAQs & More

Debt consolidation can be an effective way of making your debts more manageable. 

Most debt consolidation loans you find on the market are secured. This means that they are only available to homeowners or people who can put up some sort of collateral.

However, unsecured debt consolidation loans are also available and they can also help you in making your debts less overwhelming. 

What is Debt Consolidation? 

The process of debt consolidation refers to taking out one large loan from a single lender in order to pay off all of the debts you have to multiple creditors.

As a result, your debt becomes more manageable as now, you only have to worry about making repayments to a single creditor. 

Debt consolidation loans can be extremely useful if you have multiple debts with different creditors and it’s getting hard for you to keep track of all of them. 

Debt consolidation loans can be used to pay off many different types of debts such as credit cards, store loans, etc. 

Not only does a debt consolidation loan make your debt more manageable but it can also effectively reduce it. 

This is because when you have multiple creditors, you’re paying interest to each and every one of them. 

Once your debt is consolidated, you will save a lot of money that you would have been paying in interest if you hadn’t consolidated it. 

Taking a broad overlook at the approach you should take when looking for a debt consolidation loan: you should calculate how much debt you owe in total to all of your creditors.

You should then take out a debt of this exact amount, preferably with a more favourable interest rate. 

You will then use this amount to pay off all of your creditors. Thus, leaving you with a singular, much more manageable debt which you can pay off through monthly repayments. 

There are mainly two types of debt consolidation loans: secured and unsecured. 

Whether you’ll be able to get approved for an unsecured debt consolidation loan depends on a number of different factors such as your credit rating, how many debts you owe, your monthly income. Judging by all of these factors, your lender will decide the terms of your debt consolidation loan. 

In the case of a secured debt consolidation loan, the debt is secured against a valuable asset that you may have such as your car or your house.

If you default on your repayments towards your debt consolidation loan, then this asset would be taken from you by your lender in order to pay for your debt. 

When you’re looking for debt consolidation loans, always be sure to consider a lender that is authorised and regulated by the Financial Conduct Authority

When is Debt Consolidation a Good Idea? 

While consolidating your debt does seem like an attractive option, it’s not always the right choice for everybody.

Whether a debt consolidation loan would be worth it for you depends highly on your unique financial circumstances.

Generally, you should go for a debt consolidation loan if: 

  • The additional fees and charges involved with a debt consolidation loan are affordable and you’re not losing any savings due to them. 
  • The monthly payments for the loan are affordable and you can comfortably pay them. 
  • You can use it as a way to cut back your spending and get your finances in order. 
  • You’re effectively reducing the amount of money you owe due to better interest rates of the debt consolidation loan. 

How Much Debt Can I Consolidate? 

An unsecured debt consolidation loan works in pretty much the same way any other personal loan does. 

Debt consolidation loans can go up to £25,000. 

This means if you have multiple debts (such as credit cards or a personal loan, etc.) that total up to £25,000 or less, you can opt to go for a loan to take care of them. 

unsecured debt consolidation loan

What are the Pros and Cons of Consolidating Debt? 

Here are the benefits and risks involved with consolidating debt so you can make a more informed decision about whether you should go for it or not. 

Pros 

  • You’ll have a lower overall interest rate which means you’ll be paying less towards your debt payments in the long run. 
  • Your debt will become much easier to manage since you’ll be answerable only to one creditor. 
  • Your credit score will start improving once you start making regular payments towards your loan.

Cons

  • If you miss payments, your credit score will get worse. You may even incur some extra charges or fines if you keep missing payments. Your creditor also has the right to get a County Court Judgment (CCJ) against you if you keep missing payments for too long. 
  • Initial charges and set-up fees of debts consolidation loans can be quite expensive. It’s very important that you be aware of all of the charges involved before you opt for one.
  • There are other options you can utilise in order to reduce your debt e.g., balance transferring to a credit card with lower interest rates. 

Do Debt Consolidation Loans Affect My Credit Rating? 

While your debts consolidation loan will certainly affect your credit rating, whether this is a negative effect or a positive effect is entirely up to you. 

If you keep making regular repayments towards the loans, your credit score will even start improving.

Whereas, if you start missing payments, your credit score will deteriorate rapidly.

A record of missed payments and defaults stay within your credit history for six years since the date they were created.

If you keep missing payments, then your creditor might get a CCJ against you which is also recorded within your credit history. 

Since There’s No Collateral Involved with an Unsecured Debt Consolidation Loan, What will Happen if I Start Missing Payments? 

If you start missing payments towards your unsecured loan, your creditor still has the right to pursue you for the debt you owe to them.

Of course, they can’t seize any of your assets such as your house or your car as in the case of a secured loan but they can definitely take court action against you.

You may be contacted by debt collectors that your creditor may hire in order to extract money from you. 

Don’t Let Things Escalate

If you keep refusing to make payments, then your creditor might take out a CCJ against you. 

If the court decides that you can afford to make payments towards your creditor and you deliberately refuse to do so, then the court has the right to send bailiffs to your home. 

Bailiffs have the authority to seize your goods and sell them off in order to pay for the debt you owe. 

Hence, just because unsecured loans aren’t secured against anything, that does not mean you should not take them seriously. 

They still have dire consequences if you miss payments and they are definitely not something that you should ignore. 

Conclusion 

Unsecured debt consolidation loans are definitely something that can help you get out of a financial bind if you can find a suitable one for yourself. 

They make your debts more manageable and can effectively reduce the amount of money you owe. Just be sure to be aware of all of the risks and charges involved.


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