Unsecured Debt Consolidation Loan
An unsecured debt consolidation loan is where a loan is given without any collateral. Credit cards, payday loans, personal loans are some examples. Unsecured debt is the most common form of debt and presents the biggest problem for consumers.
There are some common problems that we have seen in our 16 plus years of experience:
Unsecured debt consolidation loans often have very high interest rates, generally ranging from 15% to 23%. This means you will end up paying much more back on the debt consolidation loan than was originally borrowed by you.
While your credit score may still look OK from an unsecured debt consolidation loan, your credit worthiness is extremely low. You may be denied credit because of your inability to make a new payment on a new loan.
We have compiled a list of different types of unsecured debt consolidation loans, in order to give you more information.
Credit Card Balance Transfers
Credit card companies know that consumers compare interest rates (APRs), so they frequently offer very low APRs, often on balance transfers. The very low APR applies for only a few months and is followed by a very high APR afterward. If you still have a balance outstanding when the low rate ends, the high rate applies to the balance as well as new transactions. You may lose the low introductory rate even sooner, for example, if your payment is even one day late.
Check the company’s disclosures of terms and conditions to see if the APR is an “introductory” rate and, if it is, how long it lasts. If you get a card with a low introductory rate, be sure you can pay it all off before the higher rate kicks in.
Additionally, if you do a balance transfer, your debt relief options may be more limited because, with the new loan, the payment history restarts. If you are unable to pay the new debt consolidation loan, there is a potential that you could be sued for fraud (due to taking out a debt without any intent of repaying it). Laws against fraud vary from state to state, and can be criminal or civil in nature.
A recommended solution is to see if you qualify for a debt relief program where you can get the benefits of low-interest rate APR transfers with additional financial savings and flexibility.
Personal Unsecured Debt Consolidation Loan (i.e. a peer-to-peer loan)?
While the idea seems attractive, the fact is that a personal unsecured debt consolidation loan (especially peer-to-peer loans) charge an initial fee plus interest.One peer-to-peer lender that we reviewed charges 2-5% of the loan balance initially and then 10-29% interest rates depending on your credit “rating.”
Additionally, if you get a peer-to-peer debt consolidation loan, your debt relief options are much more limited if you need flexibility in payments. Many of these lenders will not take into account your financial hardship as much as most credit card companies will.
A recommended solution is to see if you qualify for a debt relief program where you can get the benefits of a peer-to-peer loan with greater flexibility and financial savings.
Doug fell into the low-interest-rate net that a lot of credit card companies cast. “I was so happy to get the card, I missed the fine print that my interest rate would go from 3.5 percent for 6 months all the way up to 27 percent after that! I had four cards with the same excellent initial rate, and transferred balances from my other cards to all of them. I was fine for the initial months, but once the interest rate jumped, I had no way to pay them off. I wished I had considered a different debt relief solution instead of doing balance transfers.”
Loan From Friends or Family
You are lucky to have loved ones, friends, or family who have money and are willing to help you with your financial challenges.
You have one option: ask the individual to pay back 100% of your current debt. The individual who is close to you likely worked very long and hard to accumulate this money. Potentially, later in life they may need the money and could be short because of their having paid off your debts.
Do you feel right asking them to pay off all your debts? If you truly appreciate them, wouldn’t it be better to ask them to pay back a fraction of what is owed?
Debt Relief Program
Your second option: you enroll in a debt relief program, wait until the accounts are on average, 5-8 months delinquent to get the best reductions. Then get the loan and pay off the reduced amount in a lump sum.
We provide a referral to a credit restoration company after you finish (minimum $15,000 of debt) to assist with ensuring that your credit report is as accurate as it should be.
Let’s say that your debts are $20,000 and your payoff is $12,000 (these will vary; this is just an estimate). Now you’ve saved your friend $8,000! If you were helping a friend, would you want them to ask you for $20,000 or $12,000? Which would make you appreciate the person more?
Your credit is already affected by the amount of unsecured debt that you have. Also, part of your credit score is based on your ability to pay back a new loan. In the example above, if your friend gifted you $8,000 and the debt was resolved for $12,000, you could then buy most things in cash, thereby not having to rely on credit (and likely have the same problem again in a few years).
By your family or friend helping you with some cash to live on a cash basis instead of a credit basis, this would solve the problem instead of just putting a band-aid on it.
If you are considering a loan from friends or family, then see if you can show your appreciation for their willingness to help by only asking them to help with paying off a reduced amount.