Unsecured Loans And Debt Consolidation

Here's the problem with unsecured loans and debt consolidation... The people who need debt consolidation loans typically already have debt and or credit problems. And therefore it is unlikely that a "regular" lender is going to extend them a new unsecured loan. (And even if they do find a lender willing to lend to them, the interest rate and terms will likely be so onerous that the loan won't make sense as a debt relief option.) Let's look at this a little more closely.

Let's say that you have $25,000 worth of credit card debt. You are struggling to make the monthly payments and have actually been late on a few payments. Because of this, the credit card company(s) increased your interest rate to almost 30%. What do you do?

If the first solution that popped into your mind was to get a new debt loan for $25,000 and use the proceeds to pay off your credit card debt, you would not be unlike most people who are facing similar debt problems. But there is a problem.

Your Credit And Your Payment History (And What They Have To Do With Unsecured Loans And Debt Consolidation)

Any lender who you approach for a debt consolidation loan is going to look at two basic things. The first thing they will look at is your credit score/credit report. And second thing is your ability to pay back the loan.

Your Credit

In order to get a handle on your "riskiness" as a borrower, a lender will start by looking at your credit score and your credit report. These two items will give a lender a quick snapshot of your credit history. And your credit score (most lenders use what is called a FICO score) will ultimately determine what interest rate that you will be charged on a loan if you qualify.

Your Ability To Pay Back The Loan

The next thing the lenders will look at is your ability to pay back the loan. They will need to know what your income is, what your major expenses are, and they will look at your credit report to see what your history is when it comes to paying off debt.

Unsecured Loans And Debt Consolidation: A Catch 22

If you already have $25,000 in credit card debt, and are having trouble paying it off, it is unlikely that a lender is going to extend you more credit. It's a catch 22. You need the loan because you have to solve a debt problem, but you can't get the loan because you have a debt problem. (This is not the end of the world however, as there are other, better options for getting out of debt.)

What most lenders will want in this type of scenario is some form of security for their money. In other words, if you default on the loan, that want to make sure that there is an asset tied to the loan that they can go after. The most common asset that most people use is their home. But borrowing against your home to pay off your debts is a slippery slope at best. In my opinion there are better options.

A Final Problem With Unsecured Loans And Debt Consolidation

Even if you are successful in securing an unsecured loan, there is a high probability that the amount of the loan will not be sufficient to cover your existing debts. Again, this comes down to the fact that you are considered by most lenders as a high risk due to your current debt and credit problems.

The solution of course is to look at other debt help options, some of which are superior to consolidation loans anyway.

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