Getting an unsecured loan for debt consolidation purposes is often one of the first things that comes to one's mind when seeking debt relief. But is that a smart move? Is it even possible? And if so, is it possible to get one with a zero percent interest rate? Let's find out.
The first thing to understand is that getting a new loan to pay off old debts does nothing to reduce the amount of debts you have right now. I know that sounds obvious (and it is) but too many people have the mindset that... "if I could just get a new loan to pay off these debts, things would get better".
Instead, their focus should be on assessing their financial situation, preparing a personal budget and taking the necessary steps to increase their income and decrease their expenses. Reducing interest rates and monthly payments through a new loan (whether it be an unsecured loan for debt consolidation or perhaps a home equity loan) should be a secondary focus.
So is it recommended?
Many financial experts will say "no" (especially to a home equity loan).
The answer usually lies in the details of the loan. In many instances, even if the interest rates are lower, other details of the loan such as excessively long (and mandatory) payback terms, can make it unwise. Again, it really depends on your personal situation and the terms of the loan.
Answer: NOT VERY!
Think about it. Would you lend money to someone who is having debt problems without any security if they default on the loan? Probably not.
And if you did, you would probably want to charge a hefty interest rate to compensate yourself for the high risk. Of course that begs the question, if someone already has a loan with a high interest rate, why would they swap it for a new one with a similarly high rate?
I'll preface this suggestion with two caveats:
1. Like I mentioned above, before you start searching for ways to lower the interest rates and/or monthly payments on your debts, look long and hard at the real cause of your debt problems in the first place. If your spending continues to outstrip your income, then lowering your interest charges on your current debt will not help you in the long run. In fact it may actually harm you. Many people who get new loans to pay off existing credit card debts, end up running up huge new balances on the same credit cards very quickly. Then they are left with huge credit card debt and an unsecured loan as well.
2. If you are having severe debt problems and have a poor credit rating then this alternative may not be possible.
For some folks however, this is a handy little tool. Here it is...
As you are probably aware, many credit card companies advertise introductory offers to entice new customers to sign up for their cards. Many even offer 0% interest rates on balance transfers made from other credit cards onto the new card. Therefore, by transferring your current high interest rate balance onto a new 0% interest credit card through a balance transfer, you are in effect getting a new interest free unsecured loan.
Here's an example.
Let's say you have $10,000 in credit card debt with an interest rate of 22%. You know you have a serious debt problem and have taken the necessary first (and difficult) steps. You have reviewed your finances and prepared a household or personal budget that allows you to contribute $555 per month towards paying down your debt.
If you simply paid off the credit card debt with the 22% interest rate at $555 per month, it would take you 23 months and cost you $2,250 in interest charges. On the other hand, if you transfered your balance to a new card with an 18 month zero percent introductory rate, you would have the debt paid off within those 18 months (5 months sooner) and save yourself the $2,250 in interest charges.
If you take another look at the example above, you should notice something very important. It wasn't the lower interest rate (0% in this case) that was the key to eliminating the debt quickly. No, it was the initial focus on changing your spending habits to allow you to live within your means (by living with a budget as your financial guide) and contribute heavily each month towards paying down your debts.
That is the most important thing that you can take from this example.Not sure what your next (or first) step should be to get yourself out of debt? First, find out exactly what your debt relief options are, and then speak to a debt counselor today (free of charge).