Unsecured Loan for debt consolidation
Debtconsolidation loans, by integrating your different debts, make them easier to budget for and repay. Most of these loans are often unsecured, including student loans and credit cards.
Unsecured loans for debt consolidation don’t require collateral. You, therefore, won’t have to use your house, car, or any valuable asset to secure your loan. That also reduces the risk of losing them through lender repossession.
With a good credit score, you can choose from multiple lenders willing to offer you unsecured loans. We’ll point you to some of these lenders (the best, of course) and tell you everything else you need for your loan to be approved.
- EST. APR
- LOAN AMOUNT
- MIN. CREDIT SCORE
Best Egg
- 5.99%–29.99%
- $2,000–$50,000
- 600
LightStream
- 5.95%–19.99% (with autopay)
- $5,000–$100,000
- 660
Discover
- 6.99%–24.99%
- $2,500–$35,000
- 660
- APR range
- Fees
- Terms
- Amounth
- Unemployment protection
Bank 1
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 2
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Bank 3
- 6.95%–35.89%
- Up to 5% transfer fee
- 3–5 years
- $1,000–$40,000
- No
Table of Contents
How Unsecured Loans for debt consolidation works?
For unsecured debt consolidation loans, you don’t need any tangible collateral. You can apply for a loan and get approved based on the merits, in this case, your credit profile and income history.
While they are less risky to the borrower since you don’t offer any collateral, they are risky to the lenders who are not assured of your repayment. They, therefore, tend to be stricter during loan evaluation and subsequent approval.
Unsecured personal loans for debt consolidation take on two main approaches. The first approach involves borrowing money and paying it to the existing lenders.
Such loans, however, often come with higher fees. And, those who’ve sunk deeper in debts will part with unfavorable loan terms. Have I also mentioned the temptation to take on new debts even before clearing your debt consolidation loan?
The next approach involves the use of debt management programs. This is offered by debt relief agencies, most of which are non-profit making. In this approach, debtors won’t need to borrow more money.
The borrower makes monthly payments to the company, which in turn, pays the borrower’s lenders.
Alternatively, a lender may prefer to make direct payments to the borrower’s existing lenders. This is often straightforward and more cost-effective.
Requirements to qualify
Different lenders work under different policies. That includes the requirements each borrower must meet to qualify for a loan.
But first, the governing laws in most states require that a borrower be 18 years and above. You should also be a legal resident in the United States.
Like we earlier stated, unsecured loans for debt consolidation lenders are often stricter. First off, they pay more attention to the credit profile of a borrower.
Borrowers with poor credit scores might need to go the secured loans or joint application way. Failure to which, they may be forced to part with higher interests and unfavorable loan terms including high monthly repayments.
You should also have a strong source of income. Most lenders use this to gauge the possibility of you repaying your loan.
Though most borrowers seeking debt consolidation often have a higher debt-income-ratio, having it lower can give you an edge. With such, you’ll be offered higher loan limits, favorable loan terms, and lower rates.
Properly vet your lenders before applying with any of them. Work with one offering better loan terms and interests to reduce the chances of defaulting your new loan. Once you find such a lender, go over their policies and ensure they conform with your financial goals.
You’ll then submit a formal application containing such personal details as your name, social security number, and physical address.
Factors to take into consideration
While going for debt consolidation is an excellent way to get out of debts, you can easily go wrong with them if you are not careful. The following are some of the circumstances when you should consider going for unsecured loans for debt consolidation;
When you have a good credit score
For unsecured debt consolidation loans, your credit plays a significant role. A score of above 640 will get you easy and fast approval from most lenders. You’ll also be likely charged lower interest rates.
When you don’t want to risk your assets
Secured debt consolidation loans, though less risky to the lender, are highly risky to the borrower. A breach of your lender agreement can have you losing your property to repossession by the lender.
When you have a strong credit history
Apart from having a higher credit score, good credit history is also crucial for qualifying for unsecured debt consolidation loans. Lenders use your credit history to note your behavior when offered a loan.
Good credit history will win you faster loan approval. You’ll also likely pay lower interests and have more flexible loan terms. View it as a lender’s reward for repaying your past loans on time.
When looking to build your credit score
Unsecured personal loans will do a good job in helping you build your credit score. Repaying this debt will have your lenders updating your payment history – the one they send to credit agencies which then use such to award you scores.
Unsecured consolidation loans will not only help you repay your debts but boost your scores, too.
Once you get the loan, strive to keep up with the repayments so you don’t damage your credit profile.
Pros and cons
| Pros | Cons |
|---|---|
|
Less risky to borrowers – Since unsecured loans for debt consolidation don’t require collateral, you don’t risk repossession of your asset by the lender. |
Higher interests – unsecured debt consolidation loans are risky to lenders. They have no assurance that you’ll repay your loan. As a result, they tend to charge higher interests. This could at times make consolidation more expensive than directly repaying your debts |
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Brings different loans under one roof - consolidation integrates the multiple debts including credit card debts that a borrower has in arrears. This makes budgeting and subsequent payment easier. You’ll also rarely miss any repayments |
Stricter qualification process – Unlike in the case of secured debt consolidation loans, unsecured loan lenders tend to be stricter. And, the application process exhaustive. The lender scrutinizes your income, debt-to-income ratio, and credit history. All these have to be good not only for qualification but for flexible loan terms and lower interest rates. |
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Fixed interests – the interest rates for your unsecured loans for debt consolidation will remain the same throughout the life of your loan. This will work to your advantage when there is an increase in market rates during your loan term. You won’t be affected by the possible turbulence in the market |
The fixed interests will have you missing out on lower rates when there is a fall in the market rates |
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Fixed terms – Having a fixed term will help you stay organized and keep up with your loan repayments so you avoid the costs associated with late and missed repayments |
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Average debt consolidation unsecured loan rates
Unsecured loans for debt consolidation generally carry higher interest rates. This is partly because of the risk they pose to lenders.
Apart from the influence of the market average, the rates you’ll be charged are purely based on your credit profile and the strength of your income.
A strong income accompanied by a low debt-to-income ratio will have a lender charge you lower rates.
Borrowers with higher credit scores generally pay low rates, too. Based on their good credit profiles, lenders tend to cut them the slack. Lenders believe they are more likely to repay their loans.
Your lender will also likely consider your loan history. Such situations as bankruptcy, repossessions, and defaulted repayments create a bad image of the borrower. And, could have you paying higher interests.
Another crucial determinant of interest is the loan term. Longer loan terms, though might seem cost-effective are more expensive in the long run because of the extended period of repayment. Short-term loans are, therefore, cheaper in terms of rates.
Compare rates for different lenders and settle with the one you’re most comfortable with. The lenders in the table above have some of the best rates on unsecured debt consolidation loans. Check them out.
Secured vs Unsecured Loan for debt consolidation
Secured loans for debt consolidation are accompanied by collateral. A borrower basically secures his/her consolidation loan with a car, home, boat, or any valuable asset. The value of the security is often higher or equal to the loan being applied for.
These loans often come with lower interest rates. A borrower can also negotiate flexible loan terms and higher loan limits.
Secured loans are less risky to lenders. They have something to hold on should you fail to repay your loan.
On the flipside, secured loans are risky to borrowers. You risk repossession of your asset by the lender should you be unable to service your loan.
| Pros | Cons |
|---|---|
|
They are easy to qualify for |
Borrower risks losing his/her property in case they breach the lender agreement |
|
They carry lower interests |
|
|
Borrowers can get higher loan limits |
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Unsecured loans for debt consolidation, on the other hand, work the same way as secured debt consolidation loans.
They are, therefore, less risky to borrowers. You don’t risk losing your valuable asset to a lender. However, they are risky to lenders who are not assured that you’ll repay your loan.
They tend to attract higher interest rates than secured consolidation loans. They are also not easy to qualify for as lenders tend to highly scrutinize a borrower’s credit profile and income before approval.
| Pros | Cons |
|---|---|
|
Less risky to borrowers |
Higher interests |
|
Can help boost credit score |
Unfavorable loan terms |
You don’t need any security for your unsecured loan.
Alternatives to unsecured loans for debt consolidation
Apart from unsecured debt consolidation loans, you can also tap on the following options;
- Home equity loans – these loans let you borrow against the value of your home. Lenders send the loan proceeds in a lump sum. You’ll then proceed to pay your existing lenders. They often come with fixed rates, and repayment of your new loan starts immediately. You risk losing your property should you be unable to repay your loan.
- Secured debt consolidation loans – these work the same way as home equity loans. In both instances, you put up your property as collateral. Except for this one, you can use your vehicle, home, or any valuable property. Secured debt consolidation loans are easily approved. They also attract lower rates and fair loan terms. However, you risk losing your property to the lender should you default payment.
- Debt relief services – Here, you outsource your repayment process to a non-profit company. These companies negotiate lower rates with your lenders on your behalf. They often charge higher fees.
- Credit counseling – credit counseling companies advise borrowers on money management, budgeting, and how to avoid such situations as repossessions and bankruptcies. They also help with formulating and enforcing a Debt Management Plan for borrowers.
Frequently Asked Questions (FAQ)
Unsecured debt consolidation loans will help you integrate and pay off multiple debts without the need for collateral.
Consolidation loans are more likely to boost your credit score. Repaying your loans will have your lenders positively updating your records with credit reporting agencies.
Consolidation using personal loans may at times prove cheaper and easier. However, debt consolidation loans come with combined low-interest rates for your existing loans, which is even better.
Taking on debt consolidation loans is the best way to pay off your debts and boost your credit score. They also come with lower rates making them cheaper.
Online lenders, credit unions, and traditional banks are the most preferred. The table above has the market’s top picks.
