Is an Unsecured Loan a Good Way to Consolidate Bills?

Loans and credit agreements can be differentiated based on whether or not the lender requires the borrower to enter into a security agreement. A secured credit transaction requires the borrower to give the creditor an interest in property, such as by providing collateral. When you consolidate your loans, you can use either a secured or unsecured loan to do so. The kind of loan you use depends on your circumstances, abilities and desires.

Debt Consolidation

Unsecured consolidation loans, such as credit transfers, offer borrowers the chance to combine a group of bills into a single loan. Like other debt consolidation loans, an unsecured consolidation loan is simply a loan used to pay off bills, instead of a loan to paying for a car or a home. You must then pay back the consolidation loan lender instead of the multiple lenders you paid before consolidating the loan.

Benefits of an Unsecured Loan

An unsecured debt consolidation loan is good for debtors who do not want to provide collateral. Most credit cards are unsecured forms of credit, and when you, for example, transfer multiple balances from multiple credit cards, you have a single card with a balance. Credit card transfer offers typically come with low introductory interest rates that last a limited amount of time and come with transfer fees. Once the introductory offer expires, a higher interest rate applies.

Drawbacks of an Unsecured Loan

When a lender gives you an unsecured loan, the lender necessarily incurs more risk because it has fewer options to recover the loan funds if you default. Because of this, secured loans typically have lower interest rates than unsecured loans. When you take out an unsecured consolidation loan, such as a credit card balance transfer, you typically have a significantly higher interest rate on the transfer than you would if you used a home equity loan.

Other Options

Unsecured debt consolidation is not the only option available to debtors, nor is debt consolidation itself always the best way to manage debt. Debt consolidation loans, secured or unsecured, do nothing to eliminate the amount of money you owe. While these loans promise lower monthly payments, they also charge you more interest over the lifetime of the loan, therefore costing you more money in the long term. Responsible consumers should carefully consider all the aspects and potential impacts of a loan before committing to an unsecured consolidation.