Consolidation is a debt management option that involves taking out a loan to pay off your old debts. Often, consolidation involves a security, such as your home. However, unsecured consolidation loans also are available. Whether you can apply for unsecured consolidation loans depends on your financial situation and who you approach for the loan. Even if you qualify, you should understand when getting the loan is in your best interest.
The Short Answer
Debt consolidation that does not require collateral is available through many lenders. From that standpoint, you always can apply for an unsecured consolidation loan. However, because the criteria of each lender varies, you may be limited in where you get the loan.
Credit
Every lender will look at your credit when you apply for a consolidation loan, regardless of whether you apply for a loan that is secured or unsecured. Even so, credit is more important when your consolidation loan doesn't use collateral. With no collateral to collect if you default, the lender has to rely only on your promise to pay with an unsecured loan. The only way a lender can gauge whether you'll keep your promise is by looking at the precedent you set with previous lenders, and your credit score reflects that history. Even with good credit, an unsecured loan typically has a higher rate of interest than an unsecured one, as the CreditLoan website notes. If you are a subprime borrower -- meaning your credit score is below what the creditor assumes is ideal or prime -- interest rates will be even higher. There is no standard for what constitutes a subprime score, with some lenders considering scores as low as 600 still prime. Most lenders use scores around 700 as the cutoff for prime.
Debt-to-Income Ratio
Your debt-to-income ratio is the amount of debt you owe divided by the amount of money you have coming into your household. To take out a consolidation loan, you must show a lender you have enough money to pay the current debts you owe in addition to the consolidation loan. If your debt-to-income ratio is high, getting an unsecured consolidation loan may be difficult, because creditors may not see how you are going to pay off the loan without relying on other credit sources. Generally, creditors don't want you to enter a situation where you use one credit line to pay another.
Lender Requirements
Every lender has different requirements for their consolidation loans. For example, one may require you take a credit counseling course as part of the consolidation program, while another may offer consolidation loans only to those who are current account holders. Some lenders offer consolidation loans, but only secured ones due to the lower risk. If you want an unsecured consolidation loan, therefore, you must shop around to find the best deal. Compare terms carefully.
Considerations
Even though a secured loan may be easier to find, unsecured consolidation may help you if your situation worsens -- with unsecured consolidation, your creditor may lose the right to come after your property in bankruptcy the way they could with a secured loan. Unsecured consolidation generally is better for people with good to excellent credit (700 or better). Don't consolidate if consolidation eliminates the perks you had with old lenders or if you have very little time left on the original loans. Only include the debts with interest rates that are higher than the interest rate for the consolidation loan.
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