If you are tired of writing out a dozen checks to pay credit card bills each month it might be that you have trouble keeping track of when the various payments on these accounts are due. Perhaps you have found an opportunity to lump all of these smaller balances into one large balance with a single payment and a lower interest rate. One possibility when considering bill consolidation is to get an unsecured debt consolidation loan.
Your unsecured debt is already bound to relatively high interest rates.
Because credit card debt and other unsecured debt is not tied to collateral to secure the debt, lenders assess a higher interest rate to cover the higher risk associated with this type of loan. Consolidating all of your unsecured debt into one loan can sometimes reduce the overall interest rate.
A lender who views you as a good credit risk will be interested in offering a loan large enough to pay off all of your other unsecured debt.
If you hold multiple credit cards, you already know that the interest rates from card to card can vary 10% or more. If most of your debt is on the cards that have the higher interest rates, you will almost certainly be able to get a better rate by consolidating your unsecured debt. The new interest rate will probably be higher than the low rate cards, but significantly lower than the higher end cards. This interest reduction can save you several dollars per month in interest costs.
An unsecured debt consolidation loan will usually lower your overall monthly pay out.
Because credit cards usually have minimum payments, you are forced to pay larger amounts than necessary to each month to cover these minimums. Larger unsecured loans may not require as much difference each month between the amount of interest charged and the amount of the minimum payment. For example, if you have 10 credit cards and each one asks you to pay $50 per month more than the monthly interest charge, this amounts to $500 being paid each month toward the principle. While this is good that you are retiring your debt, it can be a heavy burden to make this payment each month.
A large unsecured consolidation loan should save you some of this money each month.
The unsecured consolidation loan may lower your overall interest cost $100 or more per month. This added on top of a savings of $200 or more per month on the minimum amount of principle payment can put hundreds of dollars per month back into your budget. If you are more worried about your month to month finances than getting out of debt quickly, this can be a good route to go.
Be careful to read the small print and do not make additional unsecured debt.
Before signing the agreement for the unsecured debt consolidation loan, make sure that you understand the rules. A late payment can cause your interest rate to double or triple. If your credit score drops significantly, your interest can also soar. This interest rate increase will cause your monthly payment to leap upward quickly. If you continue to use your now empty credit card balances, you risk hurting your credit rating because your unsecured debt will become too large. A consolidation loan should only be used if your intent is to get some payment relief until you can retire the existing debt.