Unsecured Debt Consolidation Loans - How To Choose The Best One

Unsecured debt consolidation loans are basically a way of putting all your debts into one loan with one monthly payment with no collateral required. Collateral refers to a physical asset like an automobile or a piece of real estate that the bank can seize if you default on the loan. Loans made against collateral are call “secured loans,” because your ability to repay is “secured” by the agreement that the lender can seize your collateral if you default.

A credit card is basically an unsecured loan. You do use the card to purchase real physical assets but they tend to be small and the bank does not usually try to take them back if you default. This means that unsecured loans are riskier for the bank or lending institution. They are usually much harder to get, and if you can get one, the terms are usually not as good as they would be if you had some collateral for the loan.

All of these considerations lead us to an obvious question: Why would a reputable lender want to make an unsecured loan to consolidate debt?

Most reputable lenders do not make very many of these loans, but a few will do it in some cases. Bank of America offers an unsecured debt consolidation loan for anywhere from $500 to $50,000. The interest rate can be as low as 8.99% or as high as 24.9% depending on your credit and the rate can be changed at their discretion at any time during the life of the loan. You can choose a term of 60, 72, 84 or 96 months. You can read about this loan at:

http://www.bankofamerica.com/vehicle_and_personal_loans/index.cfm?template=debt_consolidation

The shorter the repayment term the higher your monthly payment, but choosing the shortest term you can is still the best way to go, both so you can be quit of the debt quickly, and because you will save money in interest paid to BOA.

Even though Bank of America is a reputable lender, the unsecured debt consolidation option has some real drawbacks, even with them. First of all, the “unsecured debt consolidation loan” is actually a revolving line of credit, in other words, a credit card without the plastic. You can make draws against the paid down portion of the loan, and if you do, it will extend the loan term and sometimes change the interest rate. If you are late on a payment the rate jumps to 27.99%, which is not at all good.

In the worst case scenario, if you are approved for Bank of America’s unsecured debt consolidation loan, and you transfer your credit card debt into the balance to the tune of the maximum $50,000 for 96 months at $762 each month. You don’t close out your credit cards but after all, they are at a zero balance now that you have the debt consolidation loan.

Several months into the loan you or a family member starts charging up the credit card again, plus you take a draw on what you’ve paid so far and the interest rate jumps several percentage points. Before you get anywhere near the end of the 96 month term you have other credit card debt again and now your debt consolidation loan is out of control too.

If you choose any of hundreds of unscrupulous lenders who prey on people in deep debt by misrepresenting what they actually do, you can end up with an even worse credit rating than you had when you started.

Some companies negotiate with your creditors to lower the amount you have to repay. That is not illegal, but it isn’t the same as paying off your debt and will leave a mark on your credit similar to bankruptcy, even though the lenders will often tell you it won’t.

A better idea is to start with credit counseling and some financial education on debt and how to reduce or pay off debt. A good credit counselor will make you cut up all your credit cards at the very beginning if you haven’t done so already. If anyone suggests anything fancier than that, don’t sign anything until you shop around. Some “free” credit counseling services actually charge fees and will steer you to their own predatory products rather than give you good advice.

A good rule of thumb is, “if it sounds too good to be true, it probably is.” It takes awhile to get in over your head in debt. Anyone who promises to fix it for you quickly and painlessly is probably lying.