The primary difference between a secured loan and an unsecured loan is you’ll pledge an asset such as your home to serve as collateral for a secured loan.
With something so valuable to claim if the loan goes south, lenders are typically more forgiving of interest rates with secured loans. After all, having skin in the game gives them more assurance you’ll pay.
With that in mind, why would you do debt consolidation any other way? To answer this question, let’s take a look at the advantages of an unsecured credit card debt consolidation loan.
What is an Unsecured Loan?
In a nutshell, an unsecured loan is a financial instrument backed only by your promise to repay it according to the terms of the loan agreement. In other words, the only collateral you’ll pledge is your good name.
As you might well imagine, lenders are very picky about the people to whom unsecured credit card debt consolidation loans are extended. You’ll need a strong credit score to qualify — and you’ll be looking at higher interest payments than you would with a secured loan.
So why would you want one?
What’s the Biggest Benefit?
The main advantage of having an unsecured credit card debt consolidation loan is the only thing you’ll have at risk is your reputation if you can’t make your payments as agreed.
Now granted, that can be a huge factor for most people.
However, having your good name sullied is a lot less consequential than losing your home. That’s why most financial advisors strongly caution against trading unsecured credit card debt — from which you could simply walk away — for debt secured by an interest in your property.
Meanwhile, even though you’ll face a higher interest rate with an unsecured loan, you still have the potential to pay less than you would if you left things as they are. This is why it’s so important to do the math before you sign up for a consolidation loan to make sure you will come out ahead.
With that said, you also have to be careful in your choice of loans.
Credit Card Balance Transfers
It’s quite common to find your mailbox stuffed with offers from credit card issuers to move your existing balances to one of their cards in exchange for enjoying a period of up to 24 months during which no interest charges will be assessed.
(Yes, you’re going to need a strong credit score to qualify for that deal too.)
This gives you a window of up to two years within which you can pay off as many of your outstanding balances as you can at face value — sort of. You’ll usually be required to pay a percentage of the transferred amount in fees, which will be added to the new debt you create.
However, as enticing as their ultra-low introductory rates might be, these do come with a catch. You have to be careful to transfer no more than you can afford to pay off during the grace period. Otherwise you could find yourself facing an even higher interest rate on the remaining balance. Plus, some issuers will impose that elevated rate on the entire transferred balance — going all the way back to when you accepted the offer — if you do not pay it in full before the grace period ends.
The Safest Approach
With these factors in mind, it’s easy to see one of the main advantages of an unsecured credit card debt consolidation loan is the fact it’s the least risky of these options. While both of the other strategies are indeed less costly, they will also have the harshest consequences if you run into a problem paying as agreed.