A:

In a technical sense, you can consolidate unsecured debt in much the same way you consolidate secured debt; identify a financial institution that provides consolidation loans, and sign a new lending agreement. Unsecured personal debt consolidation is not as common as it once was. Today, creditors are more likely to push secured consolidation loans, even when all of the credit accounts being combined are unsecured. It is still possible to receive an unsecured consolidation loan, but you are likely to need very good credit or a strong relationship with the lender.

If you have both secured and unsecured debts, it is possible to combine them into a single loan. This usually means pledging your assets as collateral against a larger sum of money, which increases the risk to your property. However, it is an option. Secured loans tend to come with lower interest rates, which may make it worth assuming a little more risk elsewhere.

Be wary about the timing with debt consolidation. If the majority of your present unsecured debt was accumulated when you had a better credit score than you have today, your new consolidation loan might carry an interest rate that is higher than the average of your other debts.

Nevertheless, since your unsecured debts are likely to have relatively high interest rates, it is possible to lower your interest rate though an unsecured consolidation loan. This is particularly true if your unsecured accounts are primarily credit cards. In fact, you might be able to accept a no-interest or low-interest introductory rate on a credit card rather than having an unsecured new consolidation loan. There usually is a transfer charge if you choose this option.

If you have sufficient funds in your retirement account, such as a 401(k), you might instead opt to make your own consolidation loan. By taking out a loan from your retirement account to pay off your other debts, you gain several advantages. The loan is low-interest, the money is paid back to you, and the new loan does not appear on your credit report. You might be able to reduce your total interest burden, lower your debt utilization ratio and free up some cash in your monthly budget. This option only works if you have enough retirement savings to cover your debts, and it can significantly cripple your future wealth if you do not pay back the loan.

The Federal Trade Commission (FTC) warns that debt consolidation only works if you are able to improve your budgeting an borrowing habits as a result. Consolidating debt in order to borrow more money is very rarely a good idea. It may be worth your while to visit with a debt counselor before choosing the best option.

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RELATED TERMS
  1. Debt Consolidation

    The act of combining several loans or liabilities into one loan. ...
  2. Unsecured Debt

    A loan not backed by an underlying asset. Unsecured debt includes ...
  3. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  4. Loan Stock

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  5. Unsecured Creditor

    An individual or institution that lends money without obtaining ...
  6. Secured Note

    A type of loan that is backed by the borrower's assets. If a ...
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