Unsecured Debt Consolidation

Unsecured debt consolidation, it follows must be the opposite of secured debt consolidation. Therefore, unsecured debt consolidation is a process that involves a loan without the security or backing of a major asset (usually a property).

The new loan, as you now realise from other pages on this site, will be used to repay the outstanding balances of other loans. This, as before, will allow a trade off in interest rates and possibly the remaining term which will lower monthly payments.

Such unsecured debt consolidation loans are often made with everyday banks on the high street. The bank makes the loan (often as a personal loan) after assessing the income, outgoings and credit history of the customer.

Since there is no asset backing to loan, it is made with a promise to pay by the borrower. This lack of security obviously carries more risk of default than any sort of secured loan. Why?

The actual probability of a borrower defaulting on a loan is very similar whether the borrower offers security or not. In many cases it may be identical if circumstances beyond the borrowers control come into play (for example redundancy). However, the lack of security makes an unsecured loan far more risky for the lender.

This additional level of risk is not what a banker wants to see. To take additional risks, a banker needs additional returns. This means that the interest rates payable by you, the client will be higher.

As you will quickly recognise, there are different levels of risk when it comes to making a loan for an unsecured debt consolidation. Some borrowers will have a spotless credit record whilst others will have some blemishes. In these circumstances, lesser and lesser quality lenders are required.

It is in this market where real money is made and 'dodgy' loan sharks operate. The lower down the pecking order you go (in other words, the more desperate for a loan you are, and the worse your credit history is) the more likely you are to pay extraordinary rates of interest and non payment will be punished and payments enforced in ever less appealing ways.

For many of us, this is a romantic vision of crime capers and humour as portrayed by Hollywood actors who are underworld bookies and lenders. In reality this is a frightening element of our world populated by real life 'Shylocks'.

Should you be a borrower, it is of vital importance that you maintain a reputable credit score and pay on time - this is a part of the debt world that you really don't want to visit.