An Unsecured Debt Consolidation Loan and its pros and cons

Unsecured debts are a special type of debt where the requirement for gaining it is in proving your worthiness for accumulating more credit. After getting influenced by the ability of you to make monthly payments in different transactions, your credit score will become the primary basis for the monetary value of your unsecured debt which will then be awarded for your use. The only demand that is physical in nature would be your signature on this contract, and hence it is also known as signature loans. This article will highlight to you the basic information about unsecured debt consolidation loans.

Unsecured debt consolidation loans will not require you as a borrower to pledge any property or any possessions as your collateral for this loan. They will also not need you to go through credit checks and background investigation before your loan gets approved. Lastly, there will also be a need for any other person to co-sign this loan application. These are the sums of money which would be lent out to people on the basic foundation of sheer goodwill.

Secured and Unsecured Debt

There are basically four basic differences between unsecured debts and secured debts.

  1. Collateral has to be pledged

Collateral will be a type of security guaranteed to your lenders; it is basically a property or something valuable which they will be acquiring if you should fail to make your debt payments every month. The word “secured” signifies this collateral. A house or a vehicle is perhaps the most commonly available possession of a person; it generally gets put up for obtaining funds as collaterals. For a lot of personal loans, the common mode of collateral will be your home or your vehicle. Such items get put up as top priority collaterals when they try to secure funding. The problem that such secured loans have is that if the borrower were to default on payments, then the banks will have the right to seize their property as collaterals. This is quite a gamble and especially if it is a family home which is placed as collateral. If anything happens to the borrower and their family members are unable to pay off his debt they can risk losing their homes.

  • Monetary Amount can get credited

We have a lot of factors which will finally determine what the final amount is. In general, a person can get a secured debt if he takes high loan amounts as the creditors will match the collateral’s value. In case of unsecured debts, the amount can be varying however it will still be lesser than the collateral value.

  • Credit Scores

It is considered by many that unsecured debts are riskier in nature than secured debt consolidation loans, but the credit score will still be a matter of importance in both the cases. However, the central difference between these two cases is that in the former it would be more problematic for securing it when you have poor credit scores.

  • Rates of Interests

When all the things are held equal, the rates of interests are more relaxed in case of secured debts than what it is for unsecured debts. Interest rates will be high for loans which do not have collateral because it will be a more significant risk for banks and lenders to lend money to such people.

The most common types of unsecured debt consolidation loans

  • Debts from Credit cards

Credit card debts are the most obvious and common types of unsecured debts. Credit card debts almost account for around eight hundred billion dollars with an average of nearly 17 thousand dollars in every household in the United States alone. It can get seriously difficult to come out of credit card debts as they have high rates of interests and this will only go higher in the event that you miss a payment.

  • Personal and different types of business loans

There are a lot of different types of personal and business loans which will not require you to provide any collateral, and hence you will be making them into a kind of unsecured debts. It can be money which you have borrowed from your friends and family or from people who will lend you money for little interests. There are also a lot of cooperatives which can come into this category as it will not require you to provide collaterals before lending you money.

  • Student loan

In general student loans are unsecured because those people who are aspiring to get degrees will do not have any personal properties which they can even put up as collaterals. They will be instead bound by strict contracts that they shall repay their borrowed money after they graduate or get employment. Student loans are unsecured loans, and they do risk putting a lot of pressure on the public because there is no guarantee when the money will be recovered. However, it is easy for borrowers to repay the debts under these conditions and become debt free.

What are the Pros of having Unsecured Debt?

There are basically two advantages which are of primary significance with unsecured debt loans.

  1. Collateral is not required: In an unsecured debt you are not required to pledge your property, and hence you do not risk losing your precious property. Your assets will be kept intact however if you fail to repay on time, you will lose your credit scores.
  2. Easy process of application: There are different types of unsecured debts which will be available to you with relatively fewer hassles. Like for instance student loans are easy to get without having any assets. The fact that there is no collateral involved will only smoothen out the entire process.

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Unsecured debt consolidation loans will offer you easy repayment options and will not risk your property. You can go for these loans if you are sure you will be able to repay the monthly installments on time.