Everybody who is or has been in debt has considered debt consolidation loans as an option. However, few can get approved for secured consolidation loans because not everybody has enough equity left on their homes. And though unsecured consolidation loans exist, they are not easy to get. And often, this question rises: Will I be able to get an Unsecured Consolidation Loan?

Lack of collateral turns unsecured debt consolidation loans a very hard to qualify financial product. There are many issues to be considered before applying for such loans because a decline can affect your credit negatively. The issues regarding loan requirements, risk involved, loan amount and type of debt are mainly the most important ones.

The Risk Involved

On unsecured loans, the lender runs a greater risk because the legal means to recover his money if the borrower defaults on the loan are complex and costly as opposed to secured loans. This has consequences on this kind of loans and implies that the requirements for approval are harsh and the loan terms are worst than those of secured loans.

The concept of risk defines most of loans characteristics and is the variable that will determine every aspect of any financial product. All other variables reach equilibrium to keep risk to a minimum or to compensate it with proper profits. Thus, the risk you represent to the lender will determine whether you will get approved for an unsecured consolidation loan or not and on what terms.

Requirements For Approval

Someone applying for any kind of loan needs to show proof of a steady income that will let him afford the loan’s monthly payments. This implies a steady job for at least two years and a regular income proved by showing copies of pay checks or other documentation like tax payment receipts, etc.

When it comes to unsecured consolidation loans, there is no exception to this particular requirement. Moreover, the applicant may need to meet harsher requirements than with regular loans. This is due to the fact that the lender needs to make sure that the applicant will be able to afford the monthly payments because despite the borrower’s commitment, he can get into more debt by simply using credit cards or obtaining other lines of credit.

As regards to credit requirements, you may think that it does not make sense to ask for a good credit score to someone who wants to consolidate debt. However, due to the unsecured nature of these loans, there is already too much risk involved for the lender and thus, someone with a past bankruptcy, defaults or too many missed or late payments may not get approved for an unsecured consolidation loan.

Loan Amount And Debt

Also, unsecured loans never come with high amounts. Thus, if you have too much debt, you will not be able to consolidate all of it with an unsecured consolidation loan because you simply will not be able to obtain that kind of money through an unsecured debt consolidation loan.

Moreover, if you have low interest debt like subsidized loans, student loans, mortgage loans, etc. you will not be able to consolidate it either because the interest rate charged for unsecured debt consolidation loans is way too higher than the rates charged for these loans which would turn consolidation into a useless procedure.

By: Melissa Kellett

There have been a lot of changes in the way student loan interest can be handled for tax purposes. For example, the Internal Revenue Service and the U.S. Government have now included student loan interest as a tax deductible item on personal tax returns. In addition, the previous cap on maximum loan interest rates was repealed and new rates when into effect. So, what does all of this mean? Well when the new rates were announced lenders immediately began advertising campaigns to have students consolidate existing loans in order to lock in the older lower interest rates. The belief was that the newer rates would impact tax returns as the students (or their parents) began to repay educational loans.

In order to understand how a change in interest rates can have a huge effect on student loans and student taxes, one needs to have a basic understanding of debt management. For example, interest rates on the unsubsidized or privately issued loans will begin accruing from the date the loan is issued and continues to compound upon itself. Thus, deferred payment loans that also defer interest payments can generate an extremely large amount of additional debt for any student. This impact is lessoned on the federally subsidized loans as subsidized loans to not generate interest in this way.

In an attempt to promote the advancement of higher education, the government has allowed interest paid on student loans to be noted as a deduction on individual tax returns. Meanwhile, the deferred payment options allow a student to attend the university and defer payment of the student loans until completion of the degree. The loans come in both subsidized and unsubsidized forms. Subsidized as reserved for those students able to show a financial need and the government pays the interest accrued until the student completes their degree or leaves school. Unsubsidized student loans are not based upon need and the student is responsible for paying interest as it accrues on the loan. There are lenders who will offer deferred payment loans simply because of their income generating power for the underwriting financial institution. And in fact, there are lenders who have made a complete business out of providing deferred payment student loans which are targeted toward students who either do not realize or perhaps do not understand the concept of the interest charge incurred on interest accrued.

Student loans, and more specifically deferred payment student loans, that are offered within the boundaries of the federally subsidized or unsubsidized guidelines, are extremely helpful to students and parents who are trying to scrape together enough money to meet college funding needs. However, both parents and students need to be better educated in the terms of the debts they are incurring. Short of taking part in credit counseling to gain that understanding, however, both should take the time to read carefully the loan papers and the terms and conditions attached to them. They should also try, if possible, to pay the unsubsidized interest payments as it accrues. The money they saved would be a great start to a retirement fund upon graduation.

By: Clinton Maxwell

Subsidized loans are an example of these…
For example, most student loans and loans for first time homebuyers have promotional interest rates that if consolidated would turn out more onerous. Thus, when consolidating, you should be well aware of which debt you need to consolidate and which debt you need to leave aside. Sometimes it is even better not to consolidate at all.

Subsidized Loans

A subsidized loan is a loan that features a low interest rate because the rest of the costs are paid either by a third party or waived by the issuer. These loans are intended to compensate those going through underprivileged situations or to reward a particular merit. Thus, these loans are awarded according to needs or according to merit and not on a first arrived – first served basis.

Most federal student loans that have the interest rate subsidized are awarded according to the needs of the applicants and most private student loans are awarded according to merit. In either case, the applicant will pay a significantly lower interest rate for the money borrowed than if he had applied for a regular private student loan.

Why Subsidized Loans Should be Left Aside of Consolidation

These loans carry low interest rates and it is rare to find consolidation loans carrying a lower rate than the one charged by them. Thus, it makes absolutely no sense to exchange cheap debt for expensive debt. The smart thing to do is to leave subsidized loans aside from debt consolidation and concentrate on other more expensive debt like unsecured personal loan, credit card and store card balances, etc.

There is however, a situation in which it does make sense to consolidate subsidized loans paying a higher interest rate in the process. If the monthly payments of these loans or all your loans combined are not affordable and you would benefit from consolidating with a longer repayment program and thus reducing the amount of money you spend each month, then, paying a higher interest rate as long as it is not too high may be worthwhile.

Mortgage Loans

Other loans that are not suitable for consolidation are home mortgage loans. This is because most mortgage loans carry low interest rates due to their secured nature and thus, you wouldn’t benefit from consolidating them. The same goes to most home equity loans and lines of credit that carry also low interest rates.

In this case, what you can do is refinance these loans if you need to reduce the monthly payments. You’ll get lower installments at the cost of a higher interest rate. Unless you had bad credit when you obtained them and you credit improved since then. In this case you might be able to extend the repayment program and get a lower interest rate too.

By: Kate Ross