Unsecured loan is a unique type of credit facility, provided by lenders to a selected few borrowers. These loans are basically given to people who do not possess any valuable asset that can be pledged to lender. The fact that makes debt consolidation loans, unsecured or secured, rare, is that these loans are given to people who have an almost-perfect credit history.
An unsecured loan for debt consolidation is basically a loan, that is not backed by a security or a collateral and is used to pay off a number of debts. Here's a more simple explanation, in a more technical sense, unsecured and debt consolidation are two characteristics of a loan. An unsecured loan is a loan which is not secured by a collateral, unlike the secured loans.
For most of the loans, borrowers have to pledge some or the other asset with the lenders in order to get the loan sanctioned. The asset that is pledged by the lender is known as the collateral or security. If the loan is defaulted by the borrower, then the lender has a right to liquidate and sell off the collateral in order to recover the loan amount that is lost. However, in case of unsecured loans there is no security that is pledged by the borrower. Hence, an unsecured loan simply becomes a debt for the borrower.
The second feature of the loan that is equally important is the purpose of the loan. Often, it so happens that individuals and organizations tend to take many loans, incur debt and also use credit facilities. If the individuals or organizations are not able to pay off these debts and liabilities, then one of the best remedies that they can resort to is borrowing a debt consolidation loan. When a lender sanctions a debt consolidation loan, all the debts are paid off and the amount is paid off to the lender over a long period of time and a rather low rate of interest. The following are some of the reasons of availing an unsecured loan.
Reasons for Availing Unsecured Loans
One of the best options to prevent bankruptcy is to avail an unsecured loan. All the creditors are effectively paid off and the credit score is preserved.
Irritating Calls from Creditors
Unwanted calls from creditors is also a very important reason why people opt for an unsecured loan to pay off their irritating creditors.
An unsecured debt consolidation is a very good way of getting rid of the burden of multiple debts.
Conditions to Avail Unsecured Loans
This type of loan requires some very strict conditions that have to be fulfilled. These conditions have been laid down by the lenders due to the fact that the loan is an unsecured loan, and in case of a default, the lender cannot recover losses, quickly.
Good Credit Score
Having a very good credit score is probably the most important requirement that is laid down by the lenders. A very good credit rating is the best way to display a person's credit worthiness.
Good Income Projection
The second thing that all the lenders are bound to demand is a very good income projection. The income projection matters a lot because it is the only source through which the debt is repaid.
Check on Future Borrowings
Some lenders might put down the condition that there should be no future borrowings after taking a debt consolidation loans. Unsecured loans of high magnitude, often have this requirement.
Advantages of Unsecured Loan
There are some significant advantages of the unsecured loans. They are as stated below.
- All the debts of the borrower get quickly cleared off.
- As a result of the fully paid debts, the credit score increases and the credit history is improved, boosting the overall credit report.
- Borrower becomes debt free, and does not have to undergo constant debt management.
- The rate of interest and the amount for one installment is also very low, thus making the loan a very affordable deal.
- The time period of the loan is also very long and can be conveniently paid back.
Disadvantages of Unsecured Loan
This type of loans always sound to be extremely convenient. But, unsecured loans for debt consolidation do have some disadvantages.
- One of the biggest drawbacks is that borrowers often end up losing a lot of money, in the process of paying interest and installments over a very long period of time.
- The second drawback is that the loan remains recorded on credit history.
The only solution to overcome these drawbacks is to calculate the total interest properly, before actually getting the loan approved and also selecting the loan with the lowest rate of interest, installments and time period. Before applying or even searching for unsecured debt consolidation loans, clear all the small debts and try to improve and repair your credit rating as much as possible.