Make an informed decision before you get a debt consolidation loan

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Introduction

If you ask anyone in finance how to deal with multiple debt bills and credit cards, one

of the three options they give you is going to involve the word consolidation. And what

they are suggesting is to lump all your debt into one pile to manage it better.

However, in the business of debt consolidation, which is borrowing one big loan to

pay off many, there are secured and unsecured consolidations. For those who don’t

own a home or significant assets, an unsecured consolidation loan will likely be the

only option available if approved for it.

What Exactly is an Unsecured Consolidation Loan?

Normally, when one consolidates their separate loans or credit card bills, they usually secure the one big replacement loan with

their house. This is frequently done in the form of a second mortgage.

The home guarantees that if the borrower fails to pay the big loan, the

consolidation lender can still recover by forcing a sale of the home.

However, if you don’t own a home or an asset of similar value, then

the lender doesn’t have any security to work with as collateral. If the

lender still decides to give a consolidation loan, this is called

“unsecured.”

The problem with unsecured loans for lenders is not just limited to no

collateral for recovery; in bankruptcy proceedings unsecured debt

takes a back seat to secured debt. So a court could easily liquidate

limited assets in the bankruptcy proceedings on the secured creditors,

leaving nothing for the unsecured creditor claims.

This double-jeopardy for the lender has to be offset somehow. As a

result, unsecured consolidations tend to be

much more expensive for the borrower both

in the form of fees and interest charged.

Trying to obtain an unsecured consolidation

loan is always a good idea for a borrower.

First, you pretty much don’t lose anything of asset value if you find you can’t pay the loan. Second, it can

help reduce your bills from many to one monthly bill for all your debt included.

Many borrowers will try to take advantage of such programs to stave off bankruptcy, get rid of collection

agencies and lenders wanting to get paid, or simplifying a confusing debt burden.