Getting out of debt is not easy; especially when you have multiple debts in your name. If you are in multiple debts, consolidating the debts can be a good idea. You just need to take out a loan (Consolidation loan) to repay all the debts you have. After that, you just need to manage one loan by making the payments on time until it is paid off.
A consolidation loan is nothing but a personal loan that comes with a certain interest rate. You have to repay the loan within time. You can repay all the debts using the loan and pay it off within time.
Is it possible to consolidate debts without a collateral?
The answer is yes, debt consolidation without collateral is possible.
Before explaining how you can take out a debt consolidation loan without collateral, you need to understand some basic things.
Here you go:
What is collateral?
Usually, lenders lend money to the borrower in return of a property to secure the loan. The day the loan is paid off by the borrower, the property will no longer be collateral, which means the lender won’t be able to take the property anymore.
For example, if you take out a loan against your car, you are using the car as collateral. If you don’t repay the loan, the lender has the right to take possession of your car.
What is a secured loan or debt?
Remember, not all debts or loans are secured. A secured loan or debt means that the loan or debt comes against collateral.
For example, if you want to buy a house or a car, the lender can take possession of these properties/ collateral(car or house) if you don’t repay the loan as you have agreed.
But unsecured loans are not backed by any collateral. If you can’t repay the loan, the lender can’t take possession of your assets.
Credit cards, student loans, and personal loans are the example of unsecured loans.
Do you need to take out a secured loan to consolidate debts?
No, you don’t need to take out a secured loan to repay all your existing debts.
You can consider an unsecured loan (Personal loan) to consolidate your debts. After that, you need to manage that loan efficiently. And, as I have told earlier in this article that a consolidation loan is nothing but a personal loan. Hence, it is possible to consolidate debt without collateral.
Challenges of consolidating debts with the help of a consolidation loan
The idea of consolidating all your existing debts with a consolidation loan is no doubt good. By consolidating debts, you can simplify your monthly payments into one payment. Thus you can lower your monthly payments. But there are some challenges that you need to face while consolidating your debts.
You need to take out a consolidation loan with a low-interest rate
To lower your monthly payments by consolidating your debts, you need to take out a new loan with a lower interest rate. Otherwise, there is no point of consolidating your existing debts.
So, you have to find out a consolidation loan with favorable rates and charges so that you can lower your monthly payments.
Getting a low-interest rate consolidation loan can be difficult
A person who owes multiple debts has a low credit score. Thus, it becomes difficult for that person to get a consolidation loan with favorable rates and charges. In most cases, lenders consider a person as a risky borrower if he/she has a low credit score. They either don’t approve the loan application or charge a higher interest rate on the loan.
Thus, getting a lower interest rate consolidation loan can be difficult for a debtor who has a poor credit score.
There is a chance to accumulate further debts
Since consolidating debts is not the total cure of debt, there is a chance to fall into further debts for the debtor. How? Taking out a consolidation loan to repay all the existing debts is not enough, the debtor has to maintain the new loan properly.
If the debtor doesn’t make the monthly payments on time, he/she will start accumulating further interest rate on that new loan (consolidation loan). So, the debtor should practice good financial habits so that he/she can manage the new loan and repay it on time.
How can people with bad credit get a low-interest rate consolidation loan?
Getting a favorable consolidation loan can be tough for a debtor who has poor credit. But there are some ways the debtor can get a loan with a lower interest rate.
Get a co-signer
If you have a poor credit score and you want to get a consolidation loan with favorable rates and charges, you need to get a co-signer. Try to get a co-signer who has a good credit score and agree to take the responsibility of your loan. Remember, if you don’t repay the loan on time, the co-signer is liable to repay the loan on your behalf. So, it can be difficult to get a co-signer if you have really poor financial record among your friends and family.
Search, search and search
Some wise people have said that if you search efficiently, you may find your desired thing. So, you need to search efficiently to find out a lender who allows people with poor credit score to get a personal loan with a lower interest rate.
There are some banks, credit unions, and financial institutions who offer personal loans at favorable terms and rates.
Some credit unions offer a consolidation loan with a lower interest rate to the student. Some non-profit organizations who have collaboration with banks or financial institutions provide a loan with a lower interest rate.
So, you need to visit all your local banks, credit unions or financial institution to find out that loan.
Check with online lenders
Some online lenders offer personal loan with a lower interest rate. You can also search online to get such loan to consolidate your current debts. However, be very careful when taking out an online personal loan. There are many cash advances or predatory loans available online who are scam. They just need to get access to your checking account to take out the money. After that, they simply run away. So, read reviews, and check their previous record before applying for these kinds of loans.
Get a personal loan from your family members or friends
If you are getting rejections from all the lenders, then you can seek help from your family or friends to get a personal loan with no or low-interest rate.
Lastly, to get out of multiple unsecured debts (credit card debts, utility bills, and private student loan), consolidation is a good option. However, there are some other ways to get rid of your debts. Transferring balance to a new card, taking out a home equity loan, or settling the debts can be done to get rid of your debts. Choose the option that suits you best.