Consolidating debt by combining several loans into a single loan is a great way to help you keep better track of your loans and manage your repayments. Unfortunately, most debt consolidations require some form of collateral: a car, home, or item of value. However, there is a way to consolidate loans without collateral: an unsecured personal loan. Unsecured personal loans come with their own set of advantages and disadvantages. Read on to see if it’s the right choice for you.
Before considering a loan consolidation without collateral, you should first ask if you even need consolidate your loans in the first place. Do you have multiple (3+) loans with different debtors? Are you worried about their varying interest rates? Are you worried about how your loans will affect your credit score? If so, a loan consolidation may be for you.
Consolidating your loans simplifies your bookkeeping as you work with just one lender. It can reduce the overall interest rate you are paying, and can help protect your credit rating. It can also, in some circumstances, get you out of debt faster than a series of unconsolidated loans.
Collateral makes lenders happy because it gives them some way of recouping their losses if you default on a loan. For example, if you borrow money against your car, and you don’t repay your loan, your lender can repossess your car.
However, many people can’t, or would prefer not to give up collateral when taking out a loan. Sometimes, the unexpected happens, and you can’t make a loan payment. It would be devastating to lose your home or car on top of this, which is why collateral is a very unattractive option for borrowers.
Unsecured personal loans, also known as peer-to-peer loans, involve an individual borrowing money from other individuals, rather than financial institutions. The need for collateral is eliminated as people who are looking to invest fund the loan. Usually, multiple investors are involved on a loan to further reduce the risk. Investors can invest based on a comfortable level of risk, and the return is usually higher than can be found in traditional investments.
This builds a win-win situation for all involved. Borrowers can consolidate their debts without having to give up something for collateral, and lenders can invest money with a high return.
Loan consolidation is something you should seriously consider if you have multiple debts, especially if the idea of collateral was something holding you back.