Unsecured Debt Consolidation Loan – Important Facts You MUST Know!

Friday, July 10th, 2009 at 2:59 pm

All About An Unsecured Debt Consolidation Loan

A debt consolidation loan is a loan which is the end result of a process by which one’s existing and outstanding debts are merged, combined or consolidated into a single debt and then this debt is designed for repayment to a single lending entity with renewed terms and conditions which usually offer lower interest rates, extended life of the loan and, quite often, a lowered principle and thus lower monthly payments.

A debt consolidation loan is usually the easiest and quickest way by which someone (an individual or a business) can get out of heavy debt. In addition, a debt consolidation loan may be the only means by which a borrower is prevented from having to liquidate assets and then to file for bankruptcy.

The vast majority of debt consolidation loans are secured which means that they are offset against some type of collateral (a home, a car, a boat or some other valuable asset, etc.). With a secured debt consolidation loan, therefore, a lender takes very little risk while the borrower takes on the higher risk because:

• If installments toward repaying the loan become defunct, then the lender simply takes possession of the collateralized asset that was used as security.

• Because his or her risk is so low and virtually non-existent, a lender can usually afford to be generous and offer the secured debt consolidation loan at lower interest rates. This makes a secured debt consolidation loan more attractive in the eyes of a borrower.

• The borrower is risking the collateralized asset that was used as security. If something unexpected happens and the borrower suddenly loses the ability to continue paying off the secured debt consolidation loan, the asset will be taken over by the lender. Thus, this is where the risk to the borrow lies.

The other type of debt consolidation loan is the unsecured and it is much more infrequent and harder to obtain. The unsecured debt consolidation loan is so uncommon due to the fact that the brunt of the risk lies with the lender rather than with the borrower:

• A lender risks losing a great deal because an unsecured debt consolidation loan requires the borrower to use nothing but his or her good credit and no other collateralized assets.

• Because of the high risk involved, many (although not all) unsecured debt consolidation loans are offered at higher interest rates than the secured debt consolidation loans.

• In the event that something happens and the borrower is no longer able to continue paying off the unsecured debt consolidation loan and is forced to liquidate and then to file for bankruptcy, the lender may likely lose most of his or her investment and quite often all of it.

• The borrower risk losing nothing but his or her good credit rating. Therefore, unsecured debt consolidation loans are the kind of loans which are most desirable for borrowers.

• Due to the fact that unsecured debt consolidation loans are so valuable, borrowers must guard closely. Once unsecured debt consolidation loans are defunct, it is almost impossible to get other ones.