Unsecured Charge Card Debt Consolidation
Are you carrying high balances on several credit cards or maybe even maxed out one or two cards? If this is the case, you may be been thinking about a debt consolidation loan. If you have a fair amount of equity in your home or another asset such as a boat or travel trailer, you might be able to get a secured debt consolidation loan. This is one where you put up an asset to secure the debt.
If you do not have a large amount of equity in your home or some other asset you could pledge as collateral, your only real option is to get an unsecured debt consolidation loan.
Why get an unsecured loan?
There are several important reasons why it might make sense for you to get an unsecured debt consolidation loan. First, you will probably be able to get one at a much lower interest rate than you are paying on your credit cards. Second, this should make it easier for you to control your finances because you will be making only one payment a month instead of the four, five or more you’re currently making. And your payoff balance should be less because you will have a lower interest rate and more time to pay off the loan.
Not for everybody
Unfortunately, an unsecured debt consolidation loan is not for everyone. If you are so deeply in debt you feel you need a debt consolidation loan, you’re not likely to be approved for an unsecured loan. In fact, you may not be able to get any other kind of credit.
How is unsecured loan could help
Let’s assume you owe $18,000 in credit card debt. You have been making the required monthly payments but it’s inconvenient to have to pay six credit card statements every month. If you can take out an unsecured debt consolidation loan for that $18,000 you could repay it in maybe 48 to 60 months. This can sound good because you’re going from making six payments every month to just one. And your payment should be lower because you will have a lower interest rate.
The dark side
While the idea of getting out of debt quicker may seem very attractive, there are problems associated with these loans. First, there are rip off businesses that will hit you with hidden costs or steep upfront charges. Since the lender has no collateral to secure the loan, it’s taking a much higher financial risk and some companies will charge just as much as they possibly can to offset that risk. In fact, that $18,000 you borrow to replay your credit cards might end up costing you much, much more because of the charges that are added on to the loan–in addition to the interest you will pay.
You must practice self-discipline
The ugly truth about debt consolidation loans is that you might be able to pay off all your credit card debt and then have this backfire. For example, given the previous example of $18,000 in credit card debt, if you get a debt consolidation loan in this amount you will immediately have $18,000 in available credit. In fact, there’s nothing stopping you from accumulating a new $18,000 in debt. The ugly fact is that many people who get debt consolidation loans do just that and wind up in a hole that’s two times or three times as deep as where they started.
You can’t borrow your way out of debt
A debt consolidation financial loan can be an awful idea if you’re borrowing the money to “get out of debt.” You just cannot borrow your way out of debt. Debt consolidation financial loans just transfer your debt from one creditor to another–maybe with better terms–but that’s all.